Initial Coin Offerings As a Commitment to Competition

Abstract

We show that utility tokens, commonly issued in Initial Coin Offerings (ICOs), can limit rent-seeking activities of large firms with market power while preserving efficiency gains due to network effects. We model online platforms where buyers and sellers can meet to exchange services or goods. Utility tokens serve as the sole medium of exchange on a platform and can be traded in a secondary market. We demonstrate that financing the platform through an ICO allows an entrepreneur to give up monopolistic rents associated with the control of the platform and make a credible commitment to long-run competitive prices.

Keywords: ICO, Utility Tokens, Crowd-funding, Blockchain, Financing