Measuring Utility and Speculation in Blockchain Tokens

Abstract

A large segment of cryptoassets consists of tokens—simple code running on programmable blockchains such as Ethereum—that serve as a payment or governance mechanism for an underlying digital platform, usually a peer-to-peer marketplace of various services. An ongoing debate about the viability of the token market is centered on whether tokens are used purely for speculation, or have actual utility on their underlying platforms. The objective of this study is to create and validate a set of granular measures of token utility and speculation. Using disaggregated data on 270 million transactions in 891 tokens hosted on the Ethereum blockchain, we construct three intuitive measures of token utility and speculation: utility turnover (UT), speculative turnover (ST), and DeFi ratio (DF). These measures first reveal a striking decline—of about 90%—in average token utility usage since 2017. This decline coincides with an equally pronounced increase in token speculation, with exchange-based speculation peaking at mid-2020. We show that the emergence of DeFi applications, which offer increasingly levered and complex speculative tools, are crowding out both utility and speculation usages and further extending the increase in token speculation. We provide additional economic validation of our measures by relating them to future market outcomes and show that token utility negatively predicts return volatility in the cross section, while both speculative measures positively predict volatility. Additionally, DeFi activities positively predict future market-adjusted returns. These results suggest that our measures embed value-relevant information about the economic activities in the token-linked platforms, and about the intensity of speculative noise trading in these tokens, thus making them useful outcome or explanatory variables in future empirical analyses of blockchain tokens and platforms.

Keywords: platform, utility, speculation, blockchain token, Ethereum, defi