Digital Tokens and Platform Building
2018 WFA, 2019 AFA
48 Pages Posted: 18 Dec 2017 Last revised: 11 May 2020
Date Written: October 1, 2018
We present a model rationalizing the economic value of digital tokens for launching peer-to-peer platforms: By using the blockchain to transparently distribute tokens before the platform begins operation, a token sale overcomes later coordination failures between transaction counterparties during the platform operation. This result follows from forward induction reasoning, under which the costly and observable action of token acquisition credibly communicates the intent to participate on the platform. Our theoretical framework demonstrates the applications of digital tokens to entrepreneurship, including initial coin offerings (ICOs), and offers guidance for both practitioners and regulators.
Keywords: blockchain, coordination, entrepreneurship, FinTech, initial coin offering, ICO, platform, tokenomics
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