Tokenomics: Dynamic Adoption and Valuation

Abstract

We develop a dynamic asset pricing model of cryptocurrencies/tokens that allows users to conduct peer-to-peer transactions on digital platforms. The equilibrium value of tokens is determined by aggregating heterogeneous users’ transactional demand rather than discounting cash flows, as is done in standard valuation models. Endogenous platform adoption builds on user network externality and exhibits an S-curve: it starts slow, becomes volatile, and eventually tapers off. The introduction of tokens lowers users’ transaction costs on the platform by allowing users to capitalize on platform growth. The intertemporal feedback between user adoption and token price accelerates adoption and dampens user-base volatility.

Is Bitcoin Really Untethered?

“…If Tether is used to stabilize market prices during a downturn, one might expect a spike in the flow of Tether around round thresholds, as this might induce other traders, upon observing technical support at the threshold, to purchase as well. Such a pattern could also be consistent with recent theories that suggest that higher participation of users and investors makes Bitcoin more appealing to other users/investors due to network effects (Sockin and Xiong (2018), Cong, Li, and Wang (2019)).…”

“…Large purchasing by 1LSg accounts provides a coherent explanation as to how prices can be pushed above the thresholds. In addition, if other traders see such large purchasing, they might join the buying due to either technical trading indicators being triggered or through the perception of stronger network effects (Sockin and Xiong (2018), Cong, Li, and Wang (2019)).…”

Blockchain speculation or value creation? Evidence from corporate investments

“…Some other studies examine the asset pricing properties of cryptocurrencies (e.g., Bianchi, 2019; Hu, Parlour, & Rajan, 2018; Liu and Tsyvinsky, 2018; Makarov & Schoar, 2019), initial coin offerings (e.g., Catalini and Gans, 2019b; Cong, Li, and Wang, 2018; Li and Mann, 2020; Sockin and Xiong, 2020), and cryptocurrency mining activities (Cong et al., 2019; Easley, O'Hara, & Basu, 2019; Huberman, Leshno, and Moallemi, 2019). Related to our study, Chen, Wu, and Yang (2019) find that FinTech innovation creates value based on patent filings of seven types of FinTech technology, though blockchain patent filings represent less than 3% of their total sample of filings by U.S. public firms (60 blockchain patent filings from 2,429 total filings across the seven groups).…”

Cryptocurrency Competition and Market Concentration in the Presence of Network Effects

“…the recent proposed acquisition of Plaid by Visa), 34 and such risks have also been highlighted in the market, with models showing that certain conditions can allow markets to become oligopolies and market players to entrench their position in the market. 35,36…”