Decentralized Finance (Defi) Markets for Startups: Search Frictions, Intermediation, and the Efficiency of the ICO Market

Small Business Economics, 2024

33 Pages Posted: 7 Mar 2024 Last revised: 17 Apr 2025

See all articles by Paul P. Momtaz

Paul P. Momtaz

Syracuse University - Whitman School of Management; Technische Universität München (TUM) - TUM School of Management

Multiple version iconThere are 4 versions of this paper

Date Written: February 23, 2024

Abstract

Decentralized Finance (DeFi) markets may require a substantial degree of centralization to function efficiently. We show that centralization in the form of institutional investors that intermediate Initial Coin Offerings (ICOs) lead to, first, shorter time periods to reach fundraising goals and, second, higher valuations. In a search-theoretical model, we quantify the extent to which centralization mitigates frictions in a decentralized market. Centralization reduces trading delays and improves decentralized market efficiency especially in times of market downturns and when there is uncertainty about the team or product quality. Thus, the principal implication of our study is that decentralized markets for startups may not be optimal for society. Centralization is valuable because it improves the speed with which entrepreneurs and investors meet, and because it mitigates market frictions arising from asymmetric information.

Keywords: Entrepreneurial finance, Blockchain-based crowdfunding, Initial Coin Offering (ICO), Tokenization, Crypto funds, Decentralized Finance (DeFi)

JEL Classification: G23, G24, L26

Suggested Citation

Momtaz, Paul P., Decentralized Finance (Defi) Markets for Startups: Search Frictions, Intermediation, and the Efficiency of the ICO Market (February 23, 2024). Small Business Economics, 2024, Available at SSRN: https://ssrn.com/abstract=4736661

Paul P. Momtaz (Contact Author)

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244-2130
United States

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

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Munich, 80333
Germany

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