5/9/2018 The Blockchain Token Velocity Problem - CoinDesk

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The Blockchain Token Velocity Problem な職種の求⼈

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Kyle Samani  
OPINION
 Dec 8, 2017 at 09:00 UTC  |  Updated  Jan 6, 2018 at 12:05 UTC

Kyle Samani is the co-founder and managing partner of Multicoin Capital, a new thesis-driven crypto fund that invests with a multi-year time horizon in
blockchain tokens.

Basically, all token pitches include a line that goes something like this: "There is a fixed supply of tokens. As demand for the token increases, so must the price."

This logic fails to take into account the velocity problem.

In this post, I'll explain the velocity problem by providing an in-depth example. Then I'll examine mechanisms that reduce velocity.

A high-velocity example
Ticket fraud (literally reprinting and selling a ticket multiple times) for events is a huge problem.

There's a reasonable case to be made that tickets for live events should be issued on blockchains. If venues come to accept blockchain-issued tickets, this
solution should stomp out all fraud. You can't double spend blockchain-based assets.

Issuing tickets on blockchains can bring other benefits, including disallowing resale, profit sharing on resale back to the venue, capping resale amounts, etc.
Ticketing on-chain should create a lot of value for venues, artists and consumers: it eliminates fraud, reduces scalping, and reduces fees to middlemen like
Ticketmaster and StubHub.

Although I love this use case for blockchains, there is no reason that I, as a full-time crypto investor (speculator), want to actually hold Aventus, Ticketchain or
Blocktix tokens (all three are blockchain-based ticket issuance platforms). Even if these platforms become widely used and process tens of billions of dollars of
transactions, their underlying token mechanics are not structured so that the price of the underlying token will materially appreciate.

Consider a hypothetical platform that we'll call Karn, in honor of the show that never ends.

Consumers want to pay for tickets denominated in dollars. They may purchase Karn tokens as part of the ticket acquisition process, but they won't hold the
tokens for more than a few minutes at a time. There's simply no incentive to hold them and incur price risk relative to the dollar.

Venues also don't have an incentive to hold Karn tokens because they, too, want to avoid price risk. After consumers trade their tokens for concert tickets,
venue hosts will trade Karn tokens for their preferred currency. Note that this cycle can be completed in seconds by leveraging decentralized exchanges such
as 0x.

No one actually wants to hold Karn tokens. The presence of a proprietary token actually creates a worse UX for consumers by introducing an unnecessary layer
of friction into the ticket purchasing process. The moment anyone receives Karn tokens, they exchange them for something else - either a ticket (consumer) or
dollars (venue).

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5/9/2018 The Blockchain Token Velocity Problem - CoinDesk
Even if Karn becomes the global standard for ticket issuance, no one will want to hold it. BTC/ETH/USD-denominated trading volume for Karn tokens may
skyrocket as the platform becomes the global ticketing standard, but the price will grow sub-linearly relative to transaction throughput.

The primary stakeholder group who will profit from the rise in trading volume of Karn tokens will be market makers who provide liquidity for those entering and
exiting the market. This is not a bad thing. As asset pairs increase in volume and become highly liquid, bid-ask spreads collapse to near 0 percent, which is good
for consumers and venue hosts.

To be clear, in this scenario the venue hosts still win by cutting out scalpers, and consumers win because of increased fraud protection. But despite delivering
real, tangible benefits to marketplace participants, our fictional Karn token won't actually capture the value the protocol is creating.

Quantifying velocity 海外勤

Here's where velocity comes in. I define it as follows: 特
Velocity = Total Transaction Volume / Average Network Value

Therefore:
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Average Network Value = Total Transaction Volume / Velocity
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Velocity can be measured over any time span, but is normally measured annually. Trading volume can be difficult to measure. This not only includes な職種の求⼈
trading
volume that occurs on exchanges, but over-the-counter trades and actual usage of the platform.
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We can say that an asset has a velocity of 0 if, over the course of a year, no one buys or sells it. The lack of liquidity would cause the asset to trade at a discount
to its "intrinsic" value. Assets need some velocity to achieve their full intrinsic value. The difference is known as the liquidity premium.

In the case of a proprietary payment token that nobody wants to hold, velocity will grow linearly with transaction volume. Per the second equation above,
transaction volume could grow a million-fold and network value could remain constant. Almost all utility tokens suffer from this problem.

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Reducing velocity
There are a few ways a protocol can reduce the velocity of its associated asset.

1) Introduce a profit-share (or buy-and-burn) mechanism: For example, the Augur ($REP) network pays REP holders for performing work for the network. REP
tokens are like taxi medallions: you must pay for the right to work for the network. Specifically, REP holders must report event outcomes to resolve prediction
markets. A profit-share mechanism reduces token velocity because as the market price of an asset decreases, its yield increases. If the yield becomes too high,
market participants seeking yield will buy and hold the asset, increasing price and reducing velocity.

Also, a cash-flow stream makes a token easier to value using a traditional discounted cash-flow (DCF) model.

2) Build staking functions into the protocol that lock up the asset: This includes proof-of-stake mechanisms for achieving network-layer consensus. However
there are far more compelling reasons to stake than simply to achieve node consensus. For example, FunFair is a platform that powers online casinos. FunFair
only supports one-against-one games such that the player is playing the house directly (therefore no poker). The house must maintain reserves to pay out highly
unlikely events, such as a user winning big in slots or winning 10 times in a row in blackjack. The casino operators will need to lock up far more than 50 percent
of all tokens.

3) Balanced burn-and-mint mechanics: Factom is the best, and perhaps only, example.

A number of protocols have implemented the burn concept (without minting), notably FunFair. I am highly skeptical of currencies that are explicitly deflationary
to create upwards price pressure on the value of the token. In the long run, deflationary currencies will create weird incentives for holders, causing unnecessary
volatility due to excessive speculation. Burn-and-mint addresses this problem.

In Factom, the cost of using the protocol is denominated in U.S. dollars at $.001. Each use is $.001, regardless of the price of FCT. Users burn tokens to use the
protocol as designed. Independently, the protocol mints 73,000 new tokens each month and distributes them to validators (Factom is its own chain, not an
ERC20 token). If users don't burn 73,000 tokens in a month, supply increases, which should exert downwards price pressure. Conversely, if users burn more
than 73,000 tokens per month, supply decreases, exerting upward price pressure. In the long run, there should be linear relationship between the usage of
protocol and price.

The burn-and-mint dynamic is possible because Factom is its own chain. ERC20 tokens do not have network validators who can be compensated via inflation.
Burn-and-mint is possible for ERC20 tokens, albeit trickier. There's not a generic, obvious set of network participants who should receive the tokens that are
generated by inflation. Also, more technically: inflation is tricky to implement because smart contracts cannot run as daemons that auto-inflate; they must be
triggered.

4) Gamification to encourage holding: Let's revisit ticketing. Since many concerts sell out quickly, venues could prioritize customers based on having held X
tokens for Y days. If enough venues adopt this mechanic, velocity will fall.

Another example: YouNow is rolling out a proprietary in-app cryptocurrency called PROPS that allows users to tip content creators during live video broadcasts.
YouNow also has a "discover" tab. The YouNow service is more likely to rank a creator's content highly if they hold tokens. This creates an interesting dynamic
in which content creators are paid in PROPS, but need to convert to fiat to pay the bills. On the other hand, they want to hoard tokens to become more
discoverable, fueling more attention and generating more tip-based income.

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5/9/2018 The Blockchain Token Velocity Problem - CoinDesk
5) Become a store of value: This is by far the most difficult to achieve as it's not a function of a specific design mechanic, but rather a question of broader
technical viability and market acceptance. If people genuinely come to believe in a token as a store of value, there will be a significant probability that they're
willing to hold onto excess tokens rather than sell them for something else.

One reason to hold an asset is an expectation that it will increase in price. In theory, this should dampen velocity and drive up the price of the asset. This
basically defines bitcoin today. Bitcoin's value is a function of a speculative value game, not from intrinsic utility as a payment system.

Another reason to hold an asset is the expectation that its value will be stable. A number of stablecoin projects such as Maker and Basecoin are trying to create
trustless assets that are price-stable on the open market.

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Becoming a general-purpose store of value is extremely difficult. There are only a handful of projects even attempting to fulfill this vision today. It's not clear how
dominant the long-run winner will be. You can make perfectly rational arguments for a handful of currencies with 20-30 percent of global value each, a 75-5-5-5-
5-5 percent split, or an 80-20 percent split. Although money has a strong network effects, it's not clear how strong those effects are, or how much the market 特
will demand viable competition to mitigate macro-level risk associated with a single mega currency.

Takeaways
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Velocity is one of the key levers that will influence long-term, non-speculative value.
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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.
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Hence, protocol designers will be well served to incorporate mechanisms into their protocols that encourage holding, not just usage.

Gas pedal image via Shutterstock

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11 Comments CoinDesk  Tessa L Hall

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Carnassial0915 • 5 months ago
I don't know about the BlockTix or TicketChain, but for Aventus, event creators stake AVT tokens to list an event. Event goers can also stake
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AVT to signal fraudulent events (in which case, the event creator will be penalised via their stake). This "reduces velocity" as you call it.

Please research the coins before you mention them in your article. Thank you.
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concerndcitizen • 5 months ago 現地マーケ

Very well thought out article. Ticketing is a nasty business with a lot of corrupt local governments in on the take. The blockchain can't fix all
that corruption. ⼈事・管理な
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Will • 5 months ago ます
If this 'fictional ticket' did become the global standard for digital tickets, however, and was universal/inter-operable in that it could be used to
grant access to any concert, anywhere in the world, at very low cost, then surely that ubiquity would be an incentive to hold it for those who
enjoy live concerts? Then, all it takes is a gradual price increase due to these interested parties holding, for speculative investors to get
interested, a few more holders (reduced average velocity), price appreciates further, and Hey Presto, before long you have the same sort of
investment market that has driven Bitcoin to such dizzying heights. Only this time, the underlying 'ticket' also has a fundamentally useful
purpose. The price rise then incentivises more people to leverage the technical advantages of this 'ticket' for other uses, such as buying
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online groceries, thus starting a virtuous cycle. But it all has to start with the interested parties (the concert-goers) coming on board and
holding, with relatively little initial price rise, while the utility becomes established.

This article was evidently a dig at Ripple/XRP.

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Will > Will • 5 months ago

The other obvious advantage of this 'fiction ticket' that has utility is that it will never disappear once the advantages are felt. On the
other hand a token that simply increases in price because... it is increasing in price (& has very little underlying use) is, by definition, a
ponzi scheme. Of that, there can literally be no debate.
2△ ▽ • Share ›

Coinscoinscoins > Will • 5 months ago

That is not the definition of a ponzi scheme. A ponzi scheme is when a central operator generates returns for older investors
through revenue paid by new investors. Also, Having "very little use" is a matter of opinion in this example, and that also has
no relevance to ponzi schemes.
1△ ▽ • Share ›

Will Forster > Coinscoinscoins • 5 months ago

I stand corrected!! What I meant was a speculative bubble: https://www.diffen.com/diff...

One foot, about to be eaten. However, my point still stands that I would expect assets whose value is judged less by
speculation and more by their underlying usefulness (e.g. the value they bring to society), will be more sustainable in
the long term. But who knows ;)
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Pea Wormsworth > Will • 5 months ago

I have coins from the past that are dead. And I am keeping them for art. It is part of my collection and it has value to me even
if no one else appreciates it.

You cannot claim that there is no debate here. And to say that appears that you are not open to discussion... kind of a close
minded thing to say.
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Pea Wormsworth > Will • 5 months ago

According to your definition, collecting art as an investment is a ponzi scheme.

I think that definition is to wide. You cannot know how people feel emotionally about things. Buying something that you think
someone else will want more in the future simply to profit is not ponzi.

Just because you don't see value in something while others do, doesn't make you correct and them a fool. And buying and
then selling to that desire is not fraud.
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