The Role of Cryptographic Tokens and ICOs in Fostering Platform Adoption

40 Pages Posted: 31 Jul 2018 Last revised: 2 Jul 2019

See all articles by Yannis Bakos

Yannis Bakos

New York University (NYU) - Department of Information, Operations, and Management Sciences

Hanna Halaburda

Bank of Canada; New York University (NYU) - Leonard N. Stern School of Business; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: June 30, 2018

Abstract

Platform-specific digital tokens are becoming increasingly common with the proliferation of initial coin offerings (ICOs). In addition to a novel financing mechanism, such tokens can help address the coordination problem that is common in network adoption. We develop a model to investigate the use of tradable digital tokens to solve this coordination problem. Our analysis shows that platform-specific tokens, due to their tradability and consequent higher value if the platform succeeds, can provide another tool to overcome the coordination problem in a platform adoption setting and to support equilibria favorable to the platform.

We find that if the platform is not facing capital constraints, the most profitable strategy is the traditional strategy to subsidize adoption. If the platform is capital constrained, however, then token issuance provides an alternative that is increasingly attractive as the platform's cost of capital increases. With tokens, the platform trades off future revenue for present revenue, which helps finance solving the coordination problem. In that sense, even pure utility tokens have certain characteristics of equity: (1) early adopters share the future gains if the platform succeeds, and (2) the tokens provide an alternative when traditional financing is too costly or not available to the platform.

Keywords: economics of IS, ICOs, blockchain, platforms, network effects

JEL Classification: D8, G2, O3

Suggested Citation

Bakos, Yannis and Halaburda, Hanna, The Role of Cryptographic Tokens and ICOs in Fostering Platform Adoption (June 30, 2018). Available at SSRN: https://ssrn.com/abstract=3207777 or http://dx.doi.org/10.2139/ssrn.3207777

Yannis Bakos (Contact Author)

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States
212-998-0841 (Phone)

HOME PAGE: http://www.stern.nyu.edu/~bakos

Hanna Halaburda

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Munich
Germany

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