Initial Coin Offerings, Speculation, and Asset Tokenization

49 Pages Posted: 27 Mar 2019 Last revised: 9 Jul 2020

See all articles by Rowena J. Gan

Rowena J. Gan

University of Pennsylvania - The Wharton School - Operations, Information and Decisions

Gerry Tsoukalas

University of Pennsylvania - The Wharton School

Serguei Netessine

The Wharton School, University of Pennsylvania

Date Written: March 16, 2018

Abstract

Initial Coin Offerings (ICOs) are an emerging form of fundraising for Blockchain-based startups. We examine how ICOs can be leveraged in the context of asset tokenization, whereby firms issue tokens backed by future assets (i.e., inventory) to finance growth. We (i) make suggestions on how to design such ``asset-backed'' ICOs---including optimal token floating and pricing for both utility and equity tokens (aka, Security Token Offerings, STOs)---taking into account moral hazard (cash diversion), product characteristics and customer demand uncertainty, (ii) make predictions on ICO success/failure, and (iii) discuss implications on firm operating strategy. We show that in unregulated environments, ICOs can lead to significant agency costs, underproduction, and loss of firm value. These inefficiencies, however, fade as product margins and demand characteristics (mean/variance) improve, and are less severe under equity (rather than utility) token issuance. Importantly, the advantage of equity tokens stems from their inherent ability to better align incentives, and thus continues to hold even absent regulation.

Keywords: Asset Tokenization, Blockchain, Crowdfunding, Cryptocurency, Initial Coin Offerings (ICOs), Moral Hazard, Security Token Offerings (STOs), Speculators, Tokenized Inventory

Suggested Citation

Gan, Jingxing (Rowena) and Tsoukalas, Gerry and Netessine, Serguei, Initial Coin Offerings, Speculation, and Asset Tokenization (March 16, 2018). Management Science, Available at SSRN: https://ssrn.com/abstract=3361121

Jingxing (Rowena) Gan

University of Pennsylvania - The Wharton School - Operations, Information and Decisions ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://oid.wharton.upenn.edu/profile/ganj/

Gerry Tsoukalas (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Serguei Netessine

The Wharton School, University of Pennsylvania ( email )

3730 Walnut Street
Philadelphia, PA 19104-6367
United States
(215) 573 3571 (Phone)

HOME PAGE: http://www.netessine.com

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