Andreas Park PRO
Professor of Finance at UofT
Initial Coin Offerings and Platform Building
Paper by Jiasun Li and William Mann
Discussion by Andreas Park
Is there economic merit to tokens?
Do tokens solve an economic problem?
State of Debate on Tokens
This paper & nascent literature: tokens can achieve more economically than just regulatory arbitrage
Blockchain Tech Stack: Where would tokens matter?
Infrastructure
reward and
internal currency
usage fee
or
incentive
usage fee
Service
Application
Tech Stack Layer
Role of Token
Tokens as Seignorage Money to Power a Network
Infrastructure
reward and internal currency
Sustainability of network security
Chiu & Koeppl (2016), Budish (2018)
How do cryptocurrencies have value?
Biais, Bisiere, Bouvard, Casamatta (2016),
Schilling and Uhlig (2018)
Cryptocurrencies as payment for "real" costs
Sockin and Xiong (2018)
Development and subsequent seignorage
Canidio (2018), Catalini and Gans (2018)
Blockchain Platforms: Economic Transactions with "Decentralization"
Two-sided markets with fixed roles
Consumers - Producers
Consumers - Intermediaries - Producers
Traditional economy
Multi-sided or peer-to-peer markets
Consumers = Producers
requires platform building
Decentralized economy
Traditional "centralized" economy
Service Platform Tokens: Enabling Decentralization?
usage fee or incentive
Service
How do you get people to contribute to a peer to peer platform?
Li and Mann (2018)
How do you finance development without future income flow?
Canidio (2018)
What is the relationship between token prices and platform adoption?
Cong, Li, and Wang (2018)
Tokens as Payments: a New Financing Tool?
usage fee
Application
What can (utility) tokens finance that traditional securities cannot?
Chod and Lyandres (2018):
- Token \(\Rightarrow\) underinvestment, except under VC under-diversification
Davydiuk, Gupta, and Rosen (2018)
- Token retention policy is a quality signaling tool
Lee and Parlour (2018)
- Tokens as crowdfunding tool that allows producers to extract untapped customer surplus
Malinova and Park (2018)
- Tokens \(\equiv\) output pre-sale; generically equivalent to debt and equity and better than equity under moral hazard
Economic Problem that Authors Describe
file storage
computing power
verification
solar panels
babysitting
not barter but...
... everyone is producer and consumer
common resource that is lendable
pooled scalable resource
non-specialized service
Peer-to-peer interaction
Examples
Setup of baseline stage game
\(t=1\)
\(t=2\)
producer
consumer
producer
consumer
participate: both pay \(\mu\)
producing: cost \(c\)
consuming: benefit \(s\)
premise: produce only if can consume later
generically: multiple equilibria including no production
Stage Game with Token
\(t=1\)
\(t=2\)
producer
consumer
producer
consumer
first consumer buys token at \(P>0\)
token can only be used on platform
premise: token \(=\) credible commitment device/ costly signaling
result: select "always produce" equilibrium
\(t=0^*\)
buys
comment: the funds used to pay for the token are un-modeled and "discounted away" (a trick)
\(^*\)only before the very first stage game
ICO structure: how many tokens should you issue?
\(t=1\)
\(t=2\)
producers
consumers
\(t=0^*\)
consumers
producers
?
?
Equilibrium behavior with multiple tokens
equilibrium with full production exists
payoff to tokenholder higher
equilibrium with full production exists
everyone makes more than both together with single token
ICO structure: how many tokens should you issue
at which price?
low price: all buy, coordination works
high price: none buys, no coordination
mid price: one buys, either coordination or not
Question: results show possibility not impossibility of coordination - where does impossibility come from?
Additional Results on Staggered Sales
and Early Bird Discounts
Staggered sale improves coordination
Why?
- In single shot, you don't know if the other bought.
- In two rounds, you can buy and "convince" the other to join.
- Implicit assumption: "I am pivotal"
Comment: result has similar flavor to Lee and Parlour (2018) (surplus extraction)
Another mechanism: pre-sell at low threshold price for participation and then high price for later mover
Hens, Schenk-Hoppe, and Vogt (JMCB 2007)
- background idea: individual rational \(\not=\) socially/collectively optimal
develop a price-taker model of the baby-sitting co-op
run experiments on
- behaviour (supply and demand for services)
- reactions to monetary policy
finding: people behave both strategically and acts as price-takers
Related work: Capitol Hill Babysitting Co-op
Intuition for two-player setup is
clever and useful
Multi-player setup is conceptually simple and formally complex (cumbersome)
Is the strategic setup the right approach for decentralized economy?
Premise of staggered: "I am pivotal"
\(\Rightarrow\) does that reflect reality?
Final thoughts on the paper
Bigger Picture:
- by now there are several papers that show that token-issuance has economic merit
- \(\Rightarrow\) ICOs are an important financial innovation
- this paper: very useful contribution to sharpen our understanding on workings of ICOs
room for another paper
@financeUTM
andreas.park@rotman.utoronto.ca
slides.com/ap248
sites.google.com/site/parkandreas/
youtube.com/user/andreaspark2812/
Key Challenges for the Crypto Community for 2019
Technology
Legal/Regulation
Economic functions
What is the right governance structure for systems?
\(\Rightarrow\) political economy
How should we design tokens as contracts?
\(\Rightarrow\) corporate finance
How do platform payment means interact with outside world
\(\Rightarrow\) open-economy macro
How much do we have to pay operators to maintain the chain?
\(\Rightarrow\) mechanism design
Key Economic Questions for Blockchain Design
Discussion of Li & Mann "Initial Coin Offerings and Platform Building"
By Andreas Park
Discussion of Li & Mann "Initial Coin Offerings and Platform Building"
Discussion at the 2019 SFS Calvacade
