Initial Coin Offerings and Platform Building
2018 WFA, 2019 AFA
47 Pages Posted: 18 Dec 2017 Last revised: 7 Nov 2018
Date Written: October 1, 2018
In a typical initial coin offering (ICO), an entrepreneur pre-sells digital tokens which will later serve as the medium of exchange on a peer-to-peer platform. We present a model rationalizing ICOs for launching such platforms: By transparently distributing tokens before the platform operation begins, an ICO overcomes later coordination failures during platform operation, induced by a cross-side network effect between transaction counterparties. Furthermore, a critical-mass requirement that arises from an endogenous same-side network effect during the ICO rationalizes several empirical patterns observed in ICO structures. Our model provides guidance for both regulators and practitioners to discern economically valuable ICOs.
Keywords: coordination, entrepreneurial finance, fintech, ICO, network effect, platform
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