One measure that is often mentioned when viewing cryptocurrency statistics is “days destroyed.” Days destroyed is intended as a measure of economic activity, as the total transaction volume was considered unsatisfactory to this purpose.
The concept consists of attributing a certain weight to coins depending on when they were last spent. This is done by multiplying the number of days since the coins were last spent with the number of coins spent. If 10 coins were spent 10 days ago, the number of days destroyed would simply be 100 (10 coin times 10 days). The resulting number is intended to represent how much economic activity is occurring. It can be considered a measure of monetary velocity, which has been discussed in other recent posts. The velocity of money in general is the number of times one dollar or coin is spent to buy goods and services per unit of time. In other words, it represents people’s spending habits or the rapidity at which money is spend or invested.
Different from real velocity
The main difference with the velocity of money is that due to anonymity, it is not possible to tell which coins were spend on goods and services. Days destroyed is still based on transactions rather than money actually changing ownership, it will therefore overstate the actual economic activity. Assume one has 100 coins in exchange Cryptsy, which are transferred after 10 days to another account at BTC-e. This adds 1000 (10 days * 100 coins) to the number of days destroyed, despite the fact that the ownership didn’t change. The velocity of money doesn’t give more weight to rarely spent money either. This property is an indication of how many coins are being hoarded. The higher the number, the less coins are likely being hoarded. Days destroyed is, however, still a better measure than transaction volume. The latter doesn’t state anything on the rapidity at which coins are spend.
Overall, days destroyed is a fair attempt to make a statement with regard to economic activity in a blockchain. But its meaning is not very intuitive due to the additional weight attributed to older coins. This property turns the statistic in a mixed measure for both velocity and hoarding. Furthermore, due to anonimity, days destroyed could never provide more than an upper bound for economic activity. These properties have to be considered carefully before making any statement based on days destroyed.