Tokenomic levers are features of a protocol which capture value.

The degree to which a tokenomic lever affects value capture is called tokenomic leverage.

The three types of tokenomic levers act on corresponding components of the equation of exchange.

• Supply levers capture value by decreasing circulating supply.
• Demand levers increase demand for tokens, raising PQ, Total Purchase Amount in the equation of exchange.
• Velocity levers capture value by decreasing a token’s velocity.
  • Velocity levers are only hypothetical. Discerning coins based on velocity (e.g. coin age) would destroy a their fungibility, one of the key properties of money.

Tokenomic levers’ effects on value capture are proportional to their input.

Supply-side tokenomic levers

Supply-side tokenomic levers are one of two types. They decrease circulating supply of a token, which increases its value according to the cryptocurency valuation framework.

Examples

A cryptocurrency’s utility value or price floor is proportional to its use as a medium of exchange. The total value of all circulating coins, called monetary base, M is solved for in the equation of exchange.

All else equal, less coins circulating makes each one more valuable.

Tokenomic mechanisms which decrease circulating supply in this way include:

• Burns
• Collateralization
• Staking
• Lockups

Demand-side tokenomic levers

Demand levers, or mechanisms are another type.

Demand levers increase demand for a token, reflected as an increase in PQ, Total Purchase Amount in the equation of exchange.

Examples

Cryptocurrencies capture value through use as a medium of exchange.

Other kinds of tokens capture value differently.

Examples of demand levers include:

• Fees
• Collateral
• Dividends

Velocity Levers

Velocity levers must be hard coded into the protocol, which affects user experience, but limited examples exist.

Velocity levers can be justifiably imposed when gas costs are a concern – e.g. implementing a bi-weekly “paycheck” in a protocol where payments are accrued, in order to distribute tokens, rather than forcing users to pay for their own withdrawals.

A slowing of velocity can be measured in other components of the equation of exchange.

For example, a coin age scheme which incentivizes holders of a token to hold funds for longer periods of time will tend to split their coins between “old” and “new,” increasing the velocity of “new” coins and taking the “old” coins out of circulating supply. [[Valuation Methods; Determining Coin Age]] schemes are one example of tokenomic mechanisms which affect velocity.