Cyclone is a Digital Harbor for any Web3 projects, where stability continually fuels innovation.

Velocity of Money

As early as the end of the 17th century, the famous philosopher, John Locke, was concerned with the circulation of money and its significance for the true monetary value in an economy.

This concept quickly developed into a central topic in economics, so much so that it had an enormous influence on Adam Smith and his work "An Inquiry into the Nature and Causes of the Wealth of Nations", which represents a paradigm shift in economic science.

At the beginning of the 20th century, the famous economist Irving Fisher finally defined the velocity of money for the first time with his quantity equation. In simplified terms, the velocity of money is the total value of all economic transactions over a period of time divided by the amount of money available.

The velocity of money represents the number of times that money moves from one entity to another. Economists use the velocity of money to measure the rate at which money is used for goods and services in an economy.

Although it's not a primary economic indicator, tracking it alongside other significant indicators such as GDP, unemployment, and inflation can provide insights into the overall economic health.

The following economic aspects have been proven to correlate with the velocity of money:

  1. Economic Activity (production and consumption)

  2. Business Cycles (Booms and Recessions)

  3. Investor behavior (Saving and investing)

  4. Inflation.

Accordingly, the velocity of money represents the heartbeat of an economy. During times of prosperity, the velocity of money tends to be high, indicating bustling activity and frequent transactions. During an economic downturn, the velocity slows, indicating that consumers are less willing to spend money or make transactions.

Economic fundamentals of Cyclone Chain

Since 2007, there has been a significant decline in the velocity of money, coinciding with the Federal Reserve's substantial expansion of its balance sheet. This action was taken as part of measures to address the global financial crisis and counteract deflationary trends.

What do we learn from this?

  1. More savings results in declining velocity of money

  2. Rising money supply results in declining velocity of money

  3. Rising money supply is needed to stabilize an economy

  4. Declining velocity of money results in less economic activity and thus reduced wealth With these simple basics, we can now finally build the economic foundation of Cyclone Chain.

We first consider an active blockchain network as an open economy in which many different transactions take place. These transactions can be interpreted as the economic activity of the network. The average transaction volume in the native currency corresponds to the price level of the transactions per block (time unit of the blockchain).

Using the circulation supply of the native currencies, this results in the circulation speed of the money in a blockchain:

Economic Core Concept:

If you can measure the economic and technical state of a blockchain network at any point in time, you can use the velocity of money to statistically calculate what the optimal circulating supply should be at the next point in time.

This makes it theoretically possible to indirectly influence the "economic health of a blockchain network" by dynamically adjusting the coin emission and thus the circulating supply.

Economic objectives of Cyclone Chain:

Of course, we must first clarify the question of what the optimal circulating supply means in the context of the Cyclone Chain. To do this, we look in particular at the economic objectives of the Cyclone Chain:

  1. In the economic context of the Cyclone blockchain, the native cryptocurrency should be value-preserving and minimally volatile in its utility so that users of the blockchain have maximum incentive to use the native currency frequently.

  2. There should only be minimal incentives for all cyclone stakeholders to actively hoard the native cryptocurrency and thus save in the long term.

  3. The Circulating Supply is intended to reflect the economic and technological development of the Cyclone blockchain in relation to the general cryptocurrency market in order to provide investors with decision support.

  4. Wealth should be distributed in the medium to long term to those who have been the most active and economically/technologically useful for the Cyclone blockchain.

The core economic concept and the economic objectives form the fundamental basis of the innovative emission model of the Cyclone Blockchain.

Last updated