Platform Tokenization: Financing, Governance, and Moral Hazard
39 Pages Posted: 6 Oct 2019
Date Written: September 25, 2019
The paper shows that platform tokenization can alleviate underprovision of non-contractible entrepreneurial effort. We consider an entrepreneur who uses outside financing and exerts private effort to build a platform, and users who decide whether to join in response to the platform's dynamic transaction fee policy. We first show that raising capital by issuing tokens rather than equity mitigates effort underprovision because the payoff to equity investors depends on profit, whereas the payoff to token investors depends on transaction volume, which is less sensitive to effort. Second, we show that decentralized governance associated with tokenization can further mitigate effort underprovision by eliminating a potential holdup of users, which alleviates the need to provide users with incentives to join, reducing the entrepreneur's financing burden. We also show that absent adequate investor protection, token financing can lead to underinvestment, and we identify platform characteristics that favor tokenization.
Keywords: blockchain, ICO, cryptocurrency, token, platform, entrepreneurial finance, agency, moral hazard
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