Initial Coin Offerings, Speculators, and Asset Tokenization

50 Pages Posted: 27 Mar 2019 Last revised: 18 Mar 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, 2020

Abstract

Initial Coin Offerings (ICOs) are an emerging form of fundraising for Blockchain-based startups. We propose a simple model of matching supply and demand with ICOs by companies involved in production of physical goods, aka inventory/asset "tokenization''. We examine how ICOs should be designed---including optimal token floating and pricing for both utility and equity tokens (aka, security token offerings, STOs)---in the presence of moral hazard, production risk and demand uncertainty, make predictions on ICO failure, and discuss the implications on firm operational decisions and profits. We show that in the current unregulated environment, ICOs lead to risk-shifting incentives (moral hazard), and hence to agency costs, underproduction, and loss of firm value. These inefficiencies, however, fade as product margin increases and market conditions 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 hence continues to hold even in unregulated environments.

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, Speculators, and Asset Tokenization (March 16, 2020). The Wharton School Research Paper. 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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