price

• entrepreneur wants to produce a good or service
• Demand is uncertain and only revealed after production. 
• \(\Rightarrow\) maximizes monopoly profits

marginal cost

marginal revenue

general idea: sell future output

two approaches for token sales

• sell a fraction of future revenue
• = revenue sharing

• sell units of future output
• = output presale

\(\Rightarrow\) shifts marginal revenue for entrepreneuer left because get only fraction of revenue

Result: underproduction

NB: Chod and Lyandres (2018) have the same result

Result: overproduction

• revenue sharing: underproduction
• output presale: overproduction

• "does not internalize" = externality
• address externality: TAX!
• here: tax future token income
• incremental token income gets shared

• obvious answer: combine the two!

• issue \(t\) tokens ex ante
• share \(\alpha_t\) of new tokens
• token share \[\alpha_t=\frac{t}{c+t}\]

Token financing is NOT inferior!

Common result in the literature: only debt guarantees effort

Idea: entrepreneur can influence expected demand with "effort"

effort is costly

• common topic in corporate finance
• very relevant in "decentralized" world where developers are scattered around the globe
• also applicable to, e.g. established firms that do something new

Is it worth it for the entrepreneur?

Optimal contract looks like debt:

• get nothing if demand is low (only original tokenholders get anything)
• benefit if demand is high

• With moral hazard,
  • all projects that can be financed by equity can be financed by the optimal token contract but
  • some projects that can be financed by optimal tokens contracts cannot be financed by equity.

• Simple model of ICO vs equity financing from the standard corporate finance toolbox

• Theorem 1: Without frictions,
  • an optimal token contract finances the same projects as equity
  • the entrepreneur earns the same rents under the optimal token contract

• Theorem 2: With entrepreneurial moral hazard,
  • any equity-financeable project can be financed by an optimal token
  • some token-financeable projects cannot be financed by equity

• ​\(\Rightarrow\) There is economic and conceptual merit to token financing

interoperability

cybersecurity and privacy

functionality

scalability

smart contract features and verification

• system governance

  • political economy

• contract/token design

  • corporate finance

• How does platform payment interactions with outside world

  • open-economy macro

• How much do we have to pay operators to maintain the chain?

  • mechanism design

The Problem: Crypto-Schizophrenia

libertarian view of markets & regulation

rejection of economics and finance

blockchain

=

technology + economics

Three Fallacies for Crypto Markets

crypto assets = traditional equities

crypto trading = traditional trading

crypto entities = traditional firms

Nasdaq recovered ...

The German "New Market" did not - it closed for good

Is there economic merit to tokens?

Do tokens solve an economic problem?

blockchain only useful with applications

applications require (tech + economics) + business

understanding of economics on blockchain requires development

our paper: \(\exists\) real economic value in tokens, when used properly

Presell \(t\) tokens.

If quantity produced \(q>t\), then share \(\alpha_t\) of revenue from incremental \(q-t\) tokens with tokenholders

As with equity, the entrepreneur receives the full NPV.

The entrepreneuer produces optimally at \(q^t=q^m\)

If \(q<t\)  \(\Rightarrow\) redeem at rate \(t/q\) and tokenholders receive refund of \(c(t-q)\).

$25B total

$21B in 2018

for comparison: total size of

• Toronto Stock Exchange: $2,200B

• Toronto Venture Exchange: $41B

Key: you cannot collect money from just anybody!