Crypto Exchange Tokens

Abstract

Crypto exchange tokens are a major source of funding for centralized crypto exchanges. We develop a tractable model for the exchange rates of crypto exchange tokens that incorporates both the user demand as well as commonly used pledges by exchanges to buy back tokens. We derive closed-formed solutions for the valuation of exchange tokens and the time required for the exchange to fulfill their pledge. Buyback pledges can increase the amount of funding raised by selling tokens. However, the additional amount raised will be less than the discounted cost of the buyback pledge. The implication is that buyback pledges increase the cost of capital above the level that would arise if the platform were to raise funds in conventional capital markets. This wedge becomes even greater if future price manipulation by investors is taken into account.

Keywords: Asset pricing, Cryptocurrencies, Exchanges, Market manipulation

JEL Classification: G10, G12, G18