Token valuation models are used to evaluate token prices. But what’s wrong with them?
2 things about token valuation:
Token valuation is not as important as you think it is. It is important from an investor’s point of view, but from the token economics and design perspective, it is the last thing to consider.
Tokens should be valued with endogenous, not exogenous variables.
MV=PQ Token Valuation Model is wrong?
The link with Token Economics?
1) This model is meant to get the price of money.
2) Focuses on exogenous (external) variables.
Why do people still use it?
To which I’d like to comment:
Easy doesn’t mean it’s good
It’s not the only model
So what token valuation models then?
Firstly, value tokens with endogenous factors.
Some variables that can allow tokens to have endogenous value:
Expected value of funds
Dynamic price equilibrium (Athey et al., 2016)
Exchange rate of tokens to dollars reflect buyer’s willingness to buy (ex-ante, market clearing condition)
Scarcity of tokens included by pricing choices causes buyer competition that reveals consumer values
Rational expectation of exchange rate in next period by agents
Value of price commitments
Demand growth from demand of buyers
Savings function/incentives to save
Function of expected growth through demand of platform or money supply
Value to consumer
Heterogeneity of user base
Disclaimer: this is not an exclusive list. This is not applicable to every token business model. It varies from the token function. There is NO one solution that fits every ecosystem.
Secondly, allow the market to dictate the price.
Read more about the various auction types and examples using these auction mechanisms.
Dutch auctions are more for homogenous good while VCG is for heterogenous goods.
Dutch auctions are a great pricing mechanism as the market will determine the price (value to buyer) instead of seller (usually monetary focused). It is a fairer way to allocate value to everyone in the network than being hostage to the dictation of a few people. Dutch auctions is also used by government when selling bonds.
The literature is researched till here, utilities and some extent of securities. I’m interested in valuation models for crypto securities. What is the current model for non-crypto securities (bonds, stock, options). What additional considerations needs to be in place for securities in the crypto economy? How different does securities need to be, when shifting from the physical to digital marketplace.
Sources and further reading:
- Initial coin offerings and the value of crypto tokens
- Tokenomics: Dynamic Adoption and Valuation
- Quantity Theory of Money: https://en.wikipedia.org/wiki/Quantity_theory_of_money
- Equation of exchange: https://en.wikipedia.org/wiki/Equation_of_exchange
- Incentives and behavior in English, Dutch and sealed‐bid auctions