A Theory of ICOs: Diversification, Agency, and Information Asymmetry

Management Science forthcoming

36 Pages Posted: 27 Apr 2018 Last revised: 22 Jul 2020

Date Written: June 1, 2020


This paper develops a theory of financing of entrepreneurial ventures via crypto tokens, which is not limited to platform-based ventures. We compare token financing with traditional equity financing, focusing on agency problems and information asymmetry frictions associated with the two financing methods, as well as on risk sharing between entrepreneurs and investors. Token financing introduces an agency problem not present under equity financing -- underproduction, while mitigating an agency problem often associated with equity financing -- entrepreneurial effort underprovision. Our theory abstracts from all institutional and potentially transient differences between tokens and equity and is based on a single intrinsic characteristic of tokens -- they represent claims to a venture's output. We show that tokens are likely to dominate equity for ventures developing information goods or services, those for which entrepreneurial effort is crucial, and/or those with relatively low payoff volatility. In addition, tokens have can have an advantage over equity in signaling venture quality to outside investors.

Keywords: ICO, crypto tokens, agency, risk sharing, information asymmetry

Suggested Citation

Chod, Jiri and Lyandres, Evgeny, A Theory of ICOs: Diversification, Agency, and Information Asymmetry (June 1, 2020). Management Science forthcoming, Available at SSRN: https://ssrn.com/abstract=3159528 or http://dx.doi.org/10.2139/ssrn.3159528

Jiri Chod

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Evgeny Lyandres (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-3582279 (Phone)

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