Platform Tokenization: Financing, Governance, and Moral Hazard

39 Pages Posted: 6 Oct 2019

See all articles by Jiri Chod

Jiri Chod

Boston College

Nikolaos Trichakis

Massachusetts Institute of Technology (MIT)

S. Alex Yang

London Business School; The University of Hong Kong - Faculty of Business and Economics

Date Written: September 25, 2019

Abstract

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

Suggested Citation

Chod, Jiri and Trichakis, Nikolaos and Yang, S. Alex, Platform Tokenization: Financing, Governance, and Moral Hazard (September 25, 2019). Available at SSRN: https://ssrn.com/abstract=3459794 or http://dx.doi.org/10.2139/ssrn.3459794

Jiri Chod (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Nikolaos Trichakis

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

S. Alex Yang

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

HOME PAGE: http://faculty.london.edu/sayang/

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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