5.5.1 Introduction to Supply and Demand Dynamics

At its core, every blockchain network's financial health hinges on striking the right balance between token supply and demand. Irving Fisher, a luminary in the realm of economics, provides invaluable insights that resonate with the mechanics of blockchain economics. According to Fisher's equation of exchange, blockchain tokens can be perceived as typical commodities governed by foundational macroeconomic principles, most notably the law of supply and demand. In the grand ballet of economics, the price of a token is the culminating act, the moment were supply and demand dance in harmony. It signifies an equilibrium where demand equals supply. The challenge is intricate: while an excessive supply can devalue tokens, a deficit can dishearten node operators due to insufficient remuneration, unsettling the network's harmony. Thus, native tokens, which serve as the linchpin of the network's economy, need a meticulous circulation strategy.

Tokens, or cryptocurrencies, are more than mere digital assets; they are barometers of value that fuel the network's economy. These tokens, in their journey from one participant to another, can either appreciate or depreciate. Drawing from Fisher's equation of exchange, the flow of money within such a network can be articulated as:

Where:

o M represents the circulating money volume, synonymous with the issued token volume.

o V is the monetary velocity, denoting the frequency at which a unit of currency facilitates transactions within a specific timeframe. This velocity hinges largely on the economic activity facilitated by the token supply.

o P is the transaction's price level.

o Q signifies the production volume, analogous to the cumulative transaction value within a specified period in decentralized networks.

Figure 79 Economic Equilibrium

Adopting a daily timeframe and considering S as the number of tokens (token supply) and θ as the daily exchange frequency, the token's price becomes

By refining this equation and accounting for certain considerations, we arrive at:

Where τ is the hold time for tokens, inversely related to V. This equation encapsulates that the network's market capitalization, represented by M/P , equals the transaction's economic value, magnified by the token's hold time.

The implications of this equation are profound:

• The token's hold time should be maximized to bolster its investment value, subsequently uplifting the network's capitalization.

• The transaction volume, Q, in relation to the network's market capitalization, should adhere to constraints. For instance, specific guidelines suggest it should significantly be below 10, with benchmarks like ETH marked at 0.1.