Optimal Financing with Tokens
62 Pages Posted: 8 Dec 2019 Last revised: 26 Jun 2020
Date Written: November 12, 2019
We develop a model in which a startup firm issues tokens to finance a digital platform, which creates agency conflicts between platform developers and outsiders. We show that token financing is generally preferred to equity financing, unless the platform expects strong cash flows or faces severe financing needs and large agency conflicts. Tokens are characterized by their utility features, facilitating transactions, and security features, granting cash flow rights. While security features trigger endogenous network effects and spur platform adoption, they also dilute developers' equity stake and incentives so that the optimal level of security features decreases with agency conflicts and financing needs.
Keywords: Tokens, Platforms, Moral Hazard, Financial Constraints, Dividend Rights
JEL Classification: G32
Suggested Citation: Suggested Citation