$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!

exchange needed TRUST

Authority

Execution

Continuity

Do you have the item?

Do you have power over it?

Tool: key cryptography

Can we agree that it happened?

Tool:
consensus algorithm

no trusted parties needed

everything
in code

open to
anyone

platform or network

commerce thrives

How?

Cryptography: only Sue can spend her money

Problem: double-spending

How can we trust that

1. sale happened and
2. $$ only spent once?

0xA69958C146C18C1A015FDFdC85DF20Ee1BB312Bc

0x91C44E74EbF75bAA81A45dC589443194d2EBa84B

0xA65D00Eda4eEB020754C18e021b1bF4E66C9Ed90

Is there economic merit to tokens?

Do tokens solve an economic problem?

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!

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

Problem: leads to overinvestment

But: if you first pre-sell and then share revenue, then tokens are economically superior to equity financing

Problem: leads to underinvestment

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

Venture financing open to everyone

Small minimum investment amounts

Global investor base

Tokens are immediately tradable

But: This is a very narrow vision of tokens!

What does blockchain do?

peer to peer value transfers

self-powered platforms

contract execution

disintermediation

Who do you dis-intermediate, and then who is your customer?

issuer

investor

broker-dealer

investment advisor

Discussion II: Do you need to incentivize the establishment of trust?

Discussion III: What kind of incentives should/can you provide?

• is it worth it for me to engage at all

• is the desired action of the platform the best for me

• must be aligned with long-run goal of platform

• must be under the control of platform participant

What does the platform need people to do?

Is there a suitable performance metric

Utility tokens fail \(\Rightarrow\) not good platform tokens

Equity tokens fail too!

Technology

Legal/Regulation

Economic functions

interoperability

cybersecurity and privacy

functionality

scalability

smart contract features and verification

recently and unexpectedly: finality

• legal governance

  • what rules can and should a platform develop

• legal contract/token design

• Does the law have to change to accommodate new tech ? If so, how? What's dated?

• How can token design and the law be married?
  (the law should be tech neutral, but is it?)

• 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

Nasdaq recovered ...

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