To Infinity and Beyond: Financing Platforms With Uncapped Crypto Tokens
32 Pages Posted: 1 Feb 2021 Last revised: 22 Sep 2021
Rowena Gan
Southern Methodist University (SMU) - Information Technology and Operations Management Department (ITOM)
Gerry Tsoukalas
University of Pennsylvania - The Wharton School; Boston University; Luohan Academy
Serguei Netessine
The Wharton School, University of Pennsylvania
Date Written: January 31, 2021
Abstract
Problem: Initial Coin Offerings (ICOs) are an emerging form of crowdfunding for blockchain-based startups. While ICO design varies greatly in practice, many service-based platforms (e.g., Ethereum), use "uncapped" structures that forego limits on token supply, subjecting early investors to dilution risk. In this paper, we examine the conditions under which such ICOs are optimal and provide guidance for their optimal design.
Relevance: Despite their popularity in practice, uncapped ICOs are understudied and not as well understood as their capped counterparts.
Methodology: We model game-theoretic interactions among various stakeholders in an infinite-horizon setting with network effects, taking account of operational details.
Results: We show that uncapped ICOs weakly dominate capped ones in the context of service platforms. In terms of design, a platform commission and regulation are generally "substitutes" when it comes to overcoming moral hazard, but can also be combined to make ICOs more accessible, especially for platforms with high initial setup costs. ICO accessibility can also be increased by employing a dual token offering (security & transaction tokens), at the cost of reduced expected profit.
Implications: The paper provides a theoretical underpinning for the use of uncapped ICOs in practice. At a high level, it shows that ICOs succeed more easily in the presence of regulation, and platforms with low (high) setup costs should preferably issue utility (dual token) type ICOs.
Suggested Citation: Suggested Citation
Rowena Gan (Contact Author)

Southern Methodist University (SMU) - Information Technology and Operations Management Department (ITOM) ( email )
Dallas, TX 75275
United States
Gerry Tsoukalas

University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
Boston University ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
Luohan Academy ( email )
No. 556, Xixi Road, Z Space
Xihu District
Hangzhou, Zhejiang 310013
China
Serguei Netessine

The Wharton School, University of Pennsylvania ( email )
3730 Walnut Street
Philadelphia, PA 19104-6367
United States
(215) 573 3571 (Phone)
HOME PAGE: http://www.netessine.com
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