Tokenomics: When Tokens Beat Equity

37 Pages Posted: 2 Dec 2018 Last revised: 6 Dec 2018

See all articles by Katya Malinova

Katya Malinova

McMaster University - Michael G. DeGroote School of Business

Andreas Park

University of Toronto - Finance Area

Date Written: November 18, 2018

Abstract

In an initial coin offering, investors fund a venture in exchange for tokens that grant rights to future economic output. To many financial industry insiders, tokens have no intrinsic merit and exist only as a way to evade regulations. We demonstrate that generic revenue-based token contracts are indeed economically inferior to equity and lead to over- or under-production. However, an optimally designed token contract, which is a combination of an output presale and an incremental revenue sharing agreement, yields the same payoffs as equity. Moreover, with entrepreneurial moral hazard, tokens can finance a strictly larger set of ventures than equity.

Keywords: blockchain, cryptoeconomics, ICO, FinTech, coin offerings, capital structure, optimal contracts, moral hazard, cryptocurrency, tokens

Suggested Citation

Malinova, Katya and Park, Andreas, Tokenomics: When Tokens Beat Equity (November 18, 2018). Available at SSRN: https://ssrn.com/abstract=3286825 or http://dx.doi.org/10.2139/ssrn.3286825

Katya Malinova (Contact Author)

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Andreas Park

University of Toronto - Finance Area ( email )

Toronto, Ontario M5S 3E6
Canada

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