Token-Based Platforms and Speculators

Abstract

In a dynamic model of cryptocurrencies and tokens, users hold tokens for transactions and speculators hold tokens for returns. Speculation is procyclical, i.e., high in a bull and low in a bear market. Speculators affect users via two opposing effects, adverse crowding-out and benign liquidity provision, and their token investments are static substitutes but dynamic complements. A dual token structure with a governance token and stablecoin attenuates the crowding-out effect, harnesses speculator sentiment, and stimulates adoption. The model has both empirical implications regarding cryptocurrency usage and speculation, and normative implications for the optimal design of token-based or decentralized finance platforms.

Keywords: FinTech, Cryptocurrencies, Platforms, Initial Coin Offerings, Security Token Offerings, Stablecoins, Decentralized Finance, Speculation