The velocity of an object is the rate of change of its position with respect to a frame of reference and is a function of time. Simple example is car travelling at 100 mph. Though it’s a concept of kinematics, relevance can be derived in economics and more specifically in tokenomics.
In tokenomics, price of token is directly linked to usage. However, usage isn’t the only metric & this is where velocity comes into play. Gyms operate on a 100X principal to be profitable. They’re looking to get 100 times memberships than the capacity because they know not everyone is going to show up at same time, but if they do they’ll in trouble. What if a single membership is valid for 1 person at any given time & people can share it. This will lead to 99% drop in their memberships collapsing their 100X model.
Basic premise with respect of membership is that it’s linked to an individual person vs individual usage & isn’t transferable. In case of tokens, this model does have a flaw because they’re so easy to transfer. Take an example of gym where a company issued 1000 tokens for a gym with a capacity of 10 people. Now there is an intermediately company which bought 10 tokens & setup a rent-seeking program where users can rent whenever it’s needed. In this case, gym business has been screwed. None of the users have incentive to hold membership because they can borrow it whenever they want.
This is where the concept of token velocity comes. Since the basic promise behind holding a token is that you get something in return. Now the question is whether these returns are perpetual or one time. If it’s one time, then there isn’t any incentive for the owners of the tokens to hold them but if they can be flexed over time, they would have incentives to hold them as long as they see the benefit.
Similar to automotive mph term, here it’s uot which stands for “usage over time”. More usage in a short span of time leads to higher demand & lower usage over the same time would lead to lower demand. Usage is directly correlated to demand & result into price changes.
One Time Returns could be:
– Accepting cryptocurrencies to facilitate customers or attracting a new set of customers. Seller don’t have to hold it because the benefit has been reaped & is one time only
– Accessing a network to perform a single usage action without preserving your history. Example would be buying a concert ticker which is one-time event. You may attend other concerts but there would absolutely no correlation between both of them
– Proof of Work (PoW) tokens, miners can immediately sell it because the output has been achieved
– Transfer of value where a company requires a payment in specific token and you only purchase it for that specific payment.
– Stake in decisions that you’re passionate about. More like a voting power. Example would be uber drivers earning tokens & have a say in the company policies based on how many rides he has completed and similar rights for the riders.
– Right to participate in a network without transfer privileges. Example is having a membership to a club where you can’t transfer your membership. If you decide to give it up, it’s burned and never available again.
– Identity management in the network. You may use Facebook once a day however you want to preserve who you’re & despite the concert example given above your identity does matters
– Novelty or exclusivity where there are only a specific number of people allowed into the network. Once it’s closed, you can’t participate anymore.
– Pedigree building where companies incentivize long term holders. More like a loyalty give away. So, if you’ve a token of a movie theatre for 5 years, you’re allowed to book the best seat
– Profit Sharing. If the network is growing and sharing the economic upside with the token holders, they’ll hold the tokens to reap the benefit. It’s similar to dividend paying stocks
– Price appreciation. If there is an economic upside with holding tokens that’s based on fundamentals, users would like to hold the tokens. All praise to the rising sun however it does lead to plateau or crash after a while if the fundamentals aren’t there.
– Secondary benefits such as discount at a restaurant if you hold a specific gym membership
– Discounted network spent where if you earn tokens within the network & spend it back into the network, you get a discount. Example would be Airbnb allowing host to get 100% off on the fees AirBnb charges if you spend you don’t withdraw your earning.
– Discount on company products if you’re holding their tokens. So if you’re amazon token holder, you get 50% discount on the profit that amazon makes off that sale
Since tokens do allow frictionless transfers, they would come up with schemes to reduce token velocity. With higher token velocity, they’ll struggle with building an ecosystem and it’ll have a negative impact on their pricing. It’s the network strength & demand that can allow them to decrease token velocity. Ultimately if a token is so strong that it does start acting as an asset class that’s where the companies will be able to grow exponentially. Companies will have to look into the velocity problems to encourage long term holders for non-speculative reasons.