Application Development in Token-funded Ventures: Evidence from Exchange Listing

Abstract

The advent of crypto tokens has enabled ventures to raise funding through initial coin offerings (ICOs) to develop their blockchain-based applications. As of May 2019, ventures worldwide have raised over $27 billion from token-based financing. Yet, whether and how this new funding method assists ventures’ application development, a key role of any venture funding, remains largely unknown but of significant interest to entrepreneurs and policymakers. In this study, we examine the role of token-based financing in ventures’ application development by observing the liquidity of tokens on cryptocurrency exchanges. We sampled 2,076 ventures that have collectively raised $14.9 billion in ICO funding and committed 1.8 million code updates to application development between January 2015 and May 2019. We find that ventures with exchange-listed tokens experienced more tangible growth in application development relative to those without. The mechanism centers on token liquidity that facilitates application development through the feedback effect and the governance effect. Heterogeneous impacts across the regulatory stances of countries and lifecycle stages of applications further confirm the liquidity mechanism. Finally, exchange listing is positively associated with project popularity in application development. These findings pinpoint the importance of access to token liquidity in developing applications in token-funded ventures and provide policymaking implications in token-based financing.

Keywords: Blockchain, Initial Coin Offering, Exchange Listing, Token Liquidity, Application development

JEL Classification: L26, L17, G23, G24