Token-Based Platform Finance
Charles A. Dice Center Working Paper No. 2019-28
45 Pages Posted: 29 Oct 2019 Last revised: 19 Nov 2019
Date Written: November 16, 2019
We develop a dynamic model of platform economy where tokens derive value by facilitating transactions among users and the platform conducts optimal token-supply policy to finance investment in platform quality and to compensate platform owners. Even though token price is endogenously determined in a liquid market, the platform's financial constraint generates an endogenous token issuance cost that causes under-investment and conflict of interest between insiders (owners) and outsiders (users). The franchise value (seigniorage) incentivizes the owners to buy back and burn tokens out of circulation, reducing token price volatility. Blockchain technology is crucial for token-based platforms because it enables platform owners to commit to predetermined rules of token supply that can significantly improve efficiency by addressing platform owners' time inconsistency and mitigating under-investment.
Keywords: Blockchain, Cryptocurrency, Dynamic Investment, Dynamic Corporate Finance, Financial Constraint, Gig Economy, Token and Coin Offerings, Optimal Token Supply
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