What is token velocity?

Token velocity is the number of times an average token is spent or transferred within a given period. A high velocity means tokens are passed along quickly, while a low velocity means they are held. It matters because fast-moving tokens support a lot of activity with a small supply, which can limit how much value each token holds.

How it works

The idea comes from the equation of exchange: M × V = P × Q, where M is the money supply, V is velocity, and P × Q is the total value of transactions. Rearranged, the value of the token supply is the transaction value divided by velocity: M = (P × Q) ÷ V. For a given amount of activity, higher velocity means a lower required value for the token supply.

There is a trade-off. Designers often want people to use tokens, which raises velocity, but also to hold them, which lowers it. Staking, vesting or discounts for holding slow tokens down. Velocity is only an estimate and depends on how transfers are counted, so it is a guide, not an exact figure.

Example

Say an application's users make 10 million in purchases per year, paid in its token. If the average token changes hands 10 times a year, the supply needs a total value of 10 million ÷ 10 = 1 million. If velocity doubles to 20 because people spend tokens as soon as they get them, the same activity needs only 500,000 of value in supply. Holders of tokens see less value per token. These are illustrative numbers.

How to model it in Machinations

Create a Pool of tokens held by users and a Drain-and-Source pair, or a Trader, moving tokens to a second Pool each step at a rate set by a Lever for how fast users spend. A Register divides total transfers per period by the supply to show velocity. Play and chart it, then add a staking Pool that locks tokens and watch velocity fall.