Learn Why Two Major Cryptocurrency Projects Failed

 

Introduction

We illustrate two cryptocurrency projects that achieved short-term success and then failed:

  • Star Launch Token: The price fell from a maximum of 22.04, on November 28, 2021, to 0.06507 USD on July 26, 2022.

  • OHM Token: Olympus DAO project, the price fell from a maximum of 1,150 USD, on October 11, 2021, to 14.98 USD on July 26, 2022.

Although it presents volatility in the price in the short term, Bitcoin has had an increasing behavior in the long term (graph on a logarithmic scale):

 

Purpose of a currency in an economic system (ecosystem)

In everyday economics, price stability of goods and services is sought. The purpose of macroeconomics is price stability because it facilitates trade or exchange of goods and services.

In cryptocurrency economics, two purposes are sought:

  • That it facilitates the exchange of a product or service within an ecosystem (company, casino, amusement park, electronic game).

  • That it functions as an instrument of value accumulation, guaranteeing the investor an increase in its price over a period of time, as a return on investment.

To make a proper exchange of a product or service, we must use the model of supply and demand. We must construct a mathematical function describing supply and another describing demand.

The description of the economics around a cryptocurrency or token called tokenomics depends on three factors:

  • Credibility and experience of the project founders.

  • Use of the token in the project's ecosystem operations.

  • Expectations of return on investment.

 

Token issuance algorithms.

Inflationary model. - a function in which the quantity of the token is the independent variable, a constant quantity of the token will be issued regardless of whether the price rises or falls.

Deflationary model. -Price is the independent variable:

  • If the price increases, a significant amount of coins is issued.

  • If the price does not increase or remains stable, a minimum amount is issued, which generates income to finance the project's operating costs and maintain the liquidity or availability of the market.

  • In the long term, the issuance of the token decreases exponentially, the token becomes a scarce commodity.

 

The exponential function to describe the supply of a token with Inflationary model

An exponential function has a base and an exponent, in the following graph we present a family of three functions whose bases are:

  • The constant e = 2.718281828             f (X) = ex

  • Integer = 10                                               f (X) = 10x

  • Decimal = 1.7                                             f (X) = 1.7X

It has an increasing behavior, and they all cut the vertical axis at one. For ease of use we select:

f(X) = ex

To adapt the exponential function to the characteristics of the supply we are studying, it must pass through the point (0,0), instead of through the point ((0,1), so we subtract a one. In addition, for the growth to adapt to a given income, when selling a given quantity of the product we add a coefficient "a" to the exponent:

f (X) = eax - 1

 

Token Offering Example

A cryptoproject wants to earn a revenue of 40 million USD when a total of one hundred million tokens are placed:

  • The horizontal axis (x) represents the amount of token in the market in millions.

  • The vertical axis (y) represents the price as the issued token is placed in the market, so it matters how many million tokens are issued and how many million are in the market.

  • The area under the curve describing the function f(X), from X = a to X = b represents the revenue (I) to be received:

I = (Price) (quantity) = A = Area under the curve

The mathematical method that allows us to calculate income is called integral calculus:

Formulation of the mathematical model

·         X = a = 0 (sales zero units).

·         X = b = 100 (100 million units)

·         f(X) = eax – 1

·         A = 40, is the desired income of 40 million USD

As you can see, knowing integral calculus, the objective of solving this integral is to determine the value of the constant "a" that describes the exponential function to get 40 million USD of income by placing one hundred million tokens.

Solution

  1. Solving by the variable substitution method U = aX

  2. Differentiating both sides du = a dx

  3. Applying the integration formulas of exponential functions

The equation results:      40 = 1/a [e100a - (100 a + 1)].

To find the value of "a" applying the mathematical method of trial and error:

The value a = 0.006 results in A = 37.0198 being the closest to A = 40. 

Equation for Token Price Forecast

Ten million tokens will be issued per month until reaching one hundred million.

Y = e 0.006 X  - 1

 

Model results

  • If ten million cryptocurrencies are issued, starting from six cents, it will reach one hundred million at a price of 0.60 USD.

  • A disadvantage of this function: As the number of tokens exceeds the magnitude of 100 million, the price will increase drastically, with 400 million the price would be 10 USD and with 1 billion tokens, it would be 402 USD, which is contrary to the law of supply and demand, which says that a good that is abundant in the market has a low price.

  • Once a quantity is placed on the market, if the supply is greater than the demand, that quantity supplied and not sold will push the price down and there will be no mechanism to stop the price drop and in the end the project will fail economically.

 
Carlos Sampson