Measuring Utility and Speculation in Blockchain Tokens

37 Pages Posted: 2 Sep 2021 Last revised: 13 Sep 2021

See all articles by John Silberholz

John Silberholz

University of Michigan, Stephen M. Ross School of Business

Di (Andrew) Wu

University of Michigan, Stephen M. Ross School of Business

Date Written: September 1, 2021

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

Suggested Citation

Silberholz, John and Wu, Di, Measuring Utility and Speculation in Blockchain Tokens (September 1, 2021). Available at SSRN: https://ssrn.com/abstract=3915269 or http://dx.doi.org/10.2139/ssrn.3915269

John Silberholz

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Di Wu (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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