Determining the price of a token is a complex challenge in the world of cryptocurrencies and blockchain projects. Unlike traditional methods, assessing the value of a token requires a specific approach tailored to the blockchain ecosystem. In this article, we will explore the methods used to accurately determine the price of a token.
The challenges of token valuation in blockchain projects
Determining the price of a token in the ecosystem of projects based on blockchain technology presents particular complexities. Unlike traditional companies, each blockchain project develops its own business model, making it difficult to apply a universal valuation method.
In token ecosystems, there is no traditional cash flow since the tokens themselves ensure the circulation of value. Additionally, since the blockchain industry is still emerging, there is a lack of valuation history for these ecosystems. Therefore, it is almost impossible to analyze the past behavior of tokens.
It is therefore necessary to develop new methods adapted to the value of blockchain-based projects. Each token in an ecosystem has a functional value that derives from its use and its ability to solve specific network problems. However, assessing this functional value is difficult due to many subjective factors and hard-to-quantify phenomena, such as staking or token velocity.
Furthermore, the value of a token is not only functional, it is also speculative. Part of its value is tied to speculation and the impact of cryptocurrency exchanges. This speculative value is often decoupled from the actual functional value of the token, relying more on technical analysis of price curves than a deep understanding of the underlying ecosystems.
Valuation of issued tokens: an approach based on the exchange equation
Despite the complexity of valuing blockchain-based ecosystems, several methods have been developed to estimate the value of issued tokens. A well-known model is that proposed by Chris Burniske, which applies the concept of the “Equation of Exchange ” to projects based on decentralized ledger technology. This equation, traditionally used to evaluate the value of a currency in an economy, is adapted to cryptoassets by taking into account the total value of the tokens, the velocity of the tokens, the price of the resources monetized by the network and the total of the resources used. by the network.
In the case of cryptoassets, the equation is presented in the following form: M x V = P x Q .
In this equation:
- M represents the total value of the tokens.
- V represents the velocity of the tokens, which is the number of times they have been traded in a specific period.
- P represents the price of resources monetized by the network.
- Q represents the total resources used by the network.
Multiplying P and Q yields a dollar amount that represents the exchange of value in the ecosystem. This dollar amount corresponds to the gross domestic product (GDP) of the micro-economy created by the protocol and the network, and it is recorded on the blockchain.
Once the PQ amount in dollars is obtained, it is necessary to determine the value of the velocity (V) in order to be able to calculate the total value of the tokens ( M = PQ/V ). This value is used to estimate the ” Current Utility Value “ (CUV) of a token, by dividing M by the number of tokens in circulation, with the exception of “Bonded” or “Hodl’d” tokens.
Token velocity: a key indicator for token volatility and valuation
Token velocity ( V) is a crucial indicator of token volatility. It depends on the use of tokens by members of the network for the development of the protocol. An increase in the number of token use cases between network participants will lead to a significant increase in their circulation and velocity. Token velocity is typically calculated over a one-year period by comparing total transaction volume with average network volume.
A balance must be found between the circulation (velocity) and the conservation (staking) of tokens to promote the development of the value of a token. Too much velocity can lead to price instability . In addition, too low a velocity can lead to a lack of liquidity on the network .
Several methods are used to limit the velocity of tokens, such as consensus mechanisms based on token staking (such as Proof of Stake or Node consensus ) or the use of gamification mechanisms to encourage the holding of tokens.
Note that determining the price of a token in a blockchain ecosystem is a complex challenge. Traditional methods of valuing traditional companies do not apply directly to token ecosystems. Valuation models, such as the one proposed by Chris Burniske, use exchange equations tailored to blockchain ecosystems to estimate the functional value of tokens. Token velocity also plays a key role in estimating total token value. To achieve true value, it is essential to balance the circulation and retention of tokens in the network.