How Does the Liquidity of a Token Influence the Choice of Its Discount Rate?

A token's liquidity, or the ease with which it can be bought or sold without impacting its price, directly influences the discount rate. Illiquid tokens carry a higher liquidity risk premium because investors may be unable to exit their position quickly or without incurring a significant loss.

This illiquidity risk must be compensated with a higher required rate of return, thus increasing the discount rate used in the valuation model.