Decentralized Finance (DeFi) Markets for Startups: Search Frictions, Intermediation, and Efficiency

50 Pages Posted: 31 Jan 2022 Last revised: 29 Nov 2023

See all articles by Paul P. Momtaz

Paul P. Momtaz

Technische Universität München (TUM) - TUM School of Management; University College London Center for Blockchain Technologies; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: January 28, 2022

Abstract

This paper examines the efficiency of the Initial Coin Offering (ICO) market through a search- theoretical lens. Search intensity associated with the process of identifying valuable startups is increasing in market granularity. Blockchain technology increases market granularity because asset tokenization lowers entry barriers. Lower-end entrants, however, increase aggregate search intensity but may lack search skills. The resulting search-related inefficiency creates a niche for intermediaries or institutional investors that specialize on search. Consistent with the theory, specialized crypto funds increase ICO market efficiency by reducing search frictions, inter alia, by shortening the time-to-funding and increasing the funding amount. At the same time, crypto funds extract sizable economic rents for their intermediation services. Overall, the study relates to the general trade-off between centralization and decentralization in entrepreneurial finance. It suggests that market frictions specific to early-stage crowdfunding of entrepreneurship may prevent “perfectly” Decentralized Finance (DeFi) markets from functioning efficiently.

Keywords: Decentralized Finance (DeFi), Initial Coin Offering (ICO), blockchain-based crowdfunding, tokens, entrepreneurial finance, crypto funds, intermediation, search

JEL Classification: G23, G24, L26

Suggested Citation

Momtaz, Paul P., Decentralized Finance (DeFi) Markets for Startups: Search Frictions, Intermediation, and Efficiency (January 28, 2022). Available at SSRN: https://ssrn.com/abstract=4020201 or http://dx.doi.org/10.2139/ssrn.4020201

Paul P. Momtaz (Contact Author)

Technische Universität München (TUM) - TUM School of Management ( email )

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University College London Center for Blockchain Technologies ( email )

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CESifo (Center for Economic Studies and Ifo Institute) ( email )

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