How To Think About Tokenomics

5/9/2018 How to think about Tokenomics – WorkCoin – Medium
Fred Krueger Follow

Feb 11 · 6 min read
How to think about Tokenomics

As a Math and Operations research guy (PhD Stanford) , I want to start
o a formal discussion on how to model “tokenomics” (the economics
of token prices).
I want to start out with the Kyle Samani “velocity paper” which I think
is a good start but not the nal answer on this. But start reading that
before diving into the thought process below
Here are the variables
TS — Total circulating token supply, eg: 97,000,000

for ETH
P — Current price per token, eg: 834 for ETH
HT— Hold time of a a Token in Ecosystem (fraction of

year). e.g: 0.1 if the average ecosystem participant
holds the coins for a bit over one month (one tenth
of a year)
TV = transaction volume per year measure in $. Let’s

look at a marketplace doing 100 Million dollars in
transaction volume per year, and assume all of this is
in the token Then TV = 100,000,000. In the case of
ETH, TV = 1 Trillion USD.
GTV = Growth in TV per year. You want TV to be

growing as much as possible. A growth rate of 100%
or more implies that there are new entrants who
need your tokens. A zero growth rate means
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whatever equilibrium price you are at, it’s an

equilibrium — it won’t go up
TT = transaction time. How long does a transaction

last in terms of time.
TMCAP = token market cap = TS * P
R = TV / TMCAP = ratio of transaction volume to

transaction market cap. As we will show below, its
about 0.1 for ETH
R1 = R / TT. The R valuation metric is adjusted for the

transaction time.
R2 = R / HT. A di erent valuation based on hold time
Law 1: You want HT to be as big as possible.

As Kyle Samani points out, there is no value in investing in a token that
is only held for a short amount of time. The example would be buying a
ticket with tokens. If I need the token to buy the ticket, but the
transaction with the seller is immediate and he can cash out
immediately with tokens, there is zero long term demand for tokens, no
matter how big the transaction volume (TV) is.
Law 2: HT > TT.

They are not equal. Many reasons can exist for HT to be signi cantly
bigger than TT.
In the case of pure Bitcoin transactions, each transaction takes a very

small amount of time (under a day). But buying BTC with at is a
nightmare, and case take a week or longer. So the average person
needing BTC will tend to “buy in” and “fund their accounts” with BTC.
The same is true for ETH, and indeed for any good alt-coin.
So we see here clearly a reason for hoarding coins: di culty of buying

and selling them. Altcoins can further dis-incentivize selling by adding
fees for small coin redeemtions (the stick) or rewards for accumulation
(the carrot). Both work.
Law 3: Tokenomics are variable, they are

not xed at the white paper stage.
A lot of people (including Kyle Samani) are quick to knock companies
where these tokenomics are not 100% nailed in the white paper. But as
the Law 2 discussion shows, many of these economics tweaks can be
done post ICO launch. The fact that you did not plan ahead for them
does not mean they are not doable.
Law 4: Once the token is fully launched, R

should be below signi cantly below 10.
Currently, ETH is generation about 1 Million transactions per day, at 5k
/ transaction. Thats a volume of 5 Billion transactions per day or a bit
more a 1 Trillion dollars per year run rate. At its peak, ETH was
processing 1 Billion in transactions per hour .
ETH has a current market cap of 81 Billion, so it is trading at a ration R

= TV / TMCap of order of magnitude 0.1. This is way below 10, but
again the transactions are extremely short.
In general if your ecosystem is doing 10 million in annual turnover and

there are 100 million dollars in tokens, there will be very little upward
pressure on tokens. On the other hand, if like ETH, the annual turnover
is 10x the market cap, the pressure is on.
In general R is a very crude measure of token value — but does not take
into account TT or TH.
Law 5: You “probably” need to have a

reason to BUY tokens as opposed to simply
earn them.
In the previous analysis, it was assumed that there in fact was turnover
— in otherwords tokens were not just given away, they were bought.
But not all ICOs are modeled on this. Many new participants are
arguing that everything should be given away, including tokens, with
zero revenue model.
This is a tricky one to analyze. Until recently if you looked at STEEM,

the chart looked like a disaster
The 1.6 Billion market cap of STEEM was whittled down to a low of 17
million on March 16, 2017.
But then, this happened.
After making new highs in December, the cap of STEEM is still 1

BILLION. Hence the word “probably” in the title.
Law 6: R1 and R2 is a better measure than R

of pure value.
If I am doing 100 MM in volume per year, and the average transaction
time its 0.1 years, then 10MM USD in volume is tied up at any one time.
If the market cap is 100 Million, then R = 1, but R1 = 0.1, which means
that any of the 90% of tokens not in transactions can be sold in theory
to nance new entrants to the ecosystem.
However, this ignores hold times. If the average hold time is actually 6
months, then 50% of all tokens are being held in the ecosystem. In such
an equilibrium, any new growth translates into a surge in prices.
Law 7. Growth matters. A LOT

In any Equilibrium, growth in transactions will cause growth in prices
all other things considered. There are so many other considerations in
play that this is hard to quantify, but as long as a fair amount of tokens
are held in the system either inside of transactions or held by
participants, prices will tend to move up.
This is really the explanation for STEEMs recent revival. It’s growing
like crazy. STEEM is still not Reddit, but it’s growth is amazing.
Law 8. You really want an economy where

sellers become buyers
One of the real goals of an ecosystem is for all parties to be both buyers
and sellers. This is true for Ethereum and Bitcoin. As an ETH user, I
frequently both send and receive ETH. In a marketplace, you want your
sellers to nd uses for your coin as opposed to just cashing out for at
(or another coin). This plays into Law 1. You want to maximize HT.
Conclusions
It’s really hard to model token prices. But there are clearly things to
look for
• high growth (or high possibility of growth)
• incentives for people in the ecosystem to hold (either long

transaction times, which force holding, or general incentives to
hold /penalties to lqioudate)
• a reasonable transaction volume (or possibility of seeing one),

relative to market cap.

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5/9/2018 How to think about Tokenomics – WorkCoin – Medium

Fred Krueger Follow

How to think about Tokenomics

Here are the variables

TS — Total circulating token supply, eg: 97,000,000

P — Current price per token, eg: 834 for ETH

HT— Hold time of a a Token in Ecosystem (fraction of

TV = transaction volume per year measure in $. Let’s

GTV = Growth in TV per year. You want TV to be

whatever equilibrium price you are at, it’s an

TT = transaction time. How long does a transaction

TMCAP = token market cap = TS * P

R = TV / TMCAP = ratio of transaction volume to

R1 = R / TT. The R valuation metric is adjusted for the

R2 = R / HT. A di erent valuation based on hold time

Law 1: You want HT to be as big as possible.

Law 2: HT > TT.

In the case of pure Bitcoin transactions, each transaction takes a very

So we see here clearly a reason for hoarding coins: di culty of buying

Law 3: Tokenomics are variable, they are

Law 4: Once the token is fully launched, R

ETH has a current market cap of 81 Billion, so it is trading at a ration R

In general if your ecosystem is doing 10 million in annual turnover and

Law 5: You “probably” need to have a

This is a tricky one to analyze. Until recently if you looked at STEEM,

But then, this happened.

After making new highs in December, the cap of STEEM is still 1

Law 6: R1 and R2 is a better measure than R

Law 7. Growth matters. A LOT

Law 8. You really want an economy where

• high growth (or high possibility of growth)

• incentives for people in the ecosystem to hold (either long

• a reasonable transaction volume (or possibility of seeing one),

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