ADA stock-to-flow analysis would be interesting…

We strive to write these blog posts for a mixed audience. Some of you may be non-technical and be interested in crypto-currency and decentralized blockchain technology at a basic and practical level, such as what is staking and how do I stake my ADA currency. Some of you may be heavily technical from a programming and system-architecture perspective. Some may understand advanced mathematics, such as high-dimensional spaces and how geometric concepts like orthogonality (eg: right angles) can be applied to something understandable only in the abstract (eg: an 87,342 dimensional space), rather than something that can be visualized, such as three-dimensional spaces, comprised of length, width, and height dimensions. And still some of you may understand economics and the current financial system really well. Whatever your bent, we strive to strike a balance and be as accurate as possible, while not muddying the main concepts and messages with too much unnecessary detail. (Those who hangout in technical circles can often find themselves in the midst of a technical “holy war” over details, only to lose sight of the forest for the trees.)

This author does have a heavily technical, mathematical, and managerial background. One thing that the the years have taught is that there is tremendous value in exploring thoughts with communities. Questions are often more valuable than answers, in this regard. Eventually answers become important, but if you are not answering the right questions, you can be wasting lots of time. Also, people within communities bring different strengths and perspectives, and even though we’re all intelligent, posing a question to the community may yield a faster and better answer than if you were to ponder in isolation. It’s in that light that these thoughts and questions are offered for further exploration and discussion.

The Cardano project has always been one that I relate to. It is heavily researched; it is agile; the team has been making good decisions (which often means hard decisions), and they have an excellent philosophy and principles. Perhaps even more important, the main team has led by example, which has helped a robust community to form around them. This is exciting stuff! It is this type of confluence that leads to a truly sustainable community mission, one that really takes hold and builds lots of momentum! These are some of the reasons why I chose to invest time and energy into forming this stake pool.

But enough introductory remarks and onto the main idea…

A gentleman with a YouTube channel called The Cryptoviser raised some interesting thoughts on a recent post, found here:

He has a moderate but growing following at the moment, and seems to be working steadily with a balanced perspective. I like some of the questions he’s raised in the past. In the linked episode (above), he talks about the currently available supply of ADA, and how the remainder of the reserve will be released.

This hit’s at something that I’ve been thinking about for a while. Most of us agree that the path to any currency’s price appreciation is through increased utility. The more ADA is used in the real world, the more valuable it will become. Too much time spent on price predictions is silly. The price will be what it will be, when it will be. Still, we’re humans, and we enjoy seeing our holdings increase in value. We also enjoy clear understanding, so discussing price and price modeling is worth some amount of time.

There is a growing body of work and discussion around valuing bitcoin using the stock-to-flow model that is used to understand precious metals prices. Thus far, the model has very accurately predicted Bitcoin prices over the longer term. You can find some of this research/discussion in the following link, and this is probably just scratching the surface.

PlanB’s Medium Article

Why doesn’t this same model work for ADA? At the time of this writing, there is an initial supply of ~31 billion, and a “mineable” reserve of ~15 billion. An assumption could be that half of the current value of the gold supply goes to the top crypto currencies. Or maybe there is so much wealth in the world tied up in other stores of value, that it’s reasonable to assume that current worldwide value (used as a noun here) looking for a place to be stored is actually double, triple, or quadruple gold’s roughly 8 Trillion dollar total valuation, when considering the total current gold supply.

Whatever the case, we can arbitrarily choose some “reasonable” value that we could expect ADA might hit at some future time. Say we pick 2 Trillion dollars, so as not to be too greedy and leave room for others to share some of the pie. The next question is: on what schedule will the ADA reserve be released?

From a startup/business perspective, it is reasonable to assume a higher percentage of the reserve will be spent now — on things like community QA and adoption during the initial testnet phases, in order to get the project truly bootstrapped — and less percentage of the reserve at later stages, as the ecosystem becomes more stable and robust. It is also easy to imagine a day when most of the reserve has been spent, with the system operating on transaction fees alone. (Transaction fees flow from those who spend to those who save/stake. It’s impossible to live without spending something, on food and shelter, for example, but this basic model promotes a society that lives within its means, which is probably stabilizing, rather than destabilizing, to a society.) In fact, Charles Hoskinson alluded to something like this in one of his recent AMAs:

So, starting with an initial stock, and using the rough model where reserve is released more heavily at the beginning of a project, and less heavily as the project matures, don’t we find an almost identical situation to the much discussed Bitcoin halving events, where price jumps by an order of magnitude at each such event?

It seems like a reasonable model, and the invitation is now presented to any within the community who have the time; detailed understanding, and financial skill to carry this thought to the next level of detail. I’m sure the community would appreciate your efforts. After all, we, in the community, are all StakeHodlers! 😁

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