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.

Keywords: Blockchain, Carry Cost, Convenience Yield, Cryptocurrency, FinTech, Intertemporal Feedback, Means of Payment, Network Externality, Platform, Token

JEL Classification: E42, G12, L86