The Ico Paradox: Transactions Costs, Token Velocity, and Token Value

34 Pages Posted: 18 Sep 2019 Last revised: 30 Sep 2019

See all articles by Richard Holden

Richard Holden

University of New South Wales (UNSW)

Anup Malani

University of Chicago - Law School; University of Chicago Pritzker School of Medicine; Resources for the Future; National Bureau of Economic Research (NBER)

Date Written: September 2019

Abstract

Blockchain technology offers firms a novel method of raising capital, via so-called Initial Coin Offerings (ICOs). In the most novel form of an ICO, a firm creates digital assets called “utility tokens” that are tracked on a blockchain-based ledger; requires that its product be purchased only with those tokens; and then raises capital by selling these tokens to investors prior to creating any saleable product. We point out a fundamental paradox with the use of ICOs involving utility tokens. Requiring the use of utility tokens to purchase the firm's product increases the cost of that product by an amount proportional to the cost of running the blockchain that tracks the utility token. In order to increase product revenue—and thus capital raised via an ICO—the firm will want to reduce these blockchain-operating costs. Doing so, however, increases the number of utility-token transactions that take place in any time interval, i.e., increases token velocity and thus the effective supply of tokens. By Fisher's equation, this lowers the dollar value of tokens and thus the amount investors are willing to pay for them. This paradox limits the value of utility-token ICOs. We discuss alternatives to and variations of utility tokens that can mitigate the conundrum.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Suggested Citation

Holden, Richard and Malani, Anup, The Ico Paradox: Transactions Costs, Token Velocity, and Token Value (September 2019). NBER Working Paper No. w26265. Available at SSRN: https://ssrn.com/abstract=3454366

Richard Holden (Contact Author)

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Anup Malani

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-9602 (Phone)
773-702-0730 (Fax)

HOME PAGE: http://www.law.uchicago.edu/faculty/malani/

University of Chicago Pritzker School of Medicine

Chicago, IL 60637
United States

Resources for the Future

1616 P Street, NW
Washington, DC 20036
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
5
Abstract Views
71
PlumX Metrics