Andreas Park PRO
Professor of Finance at UofT
Instructors: Andreas Park
Data: coinschedule
Around 1B in token sales so far
https://cryptorank.io/
IEO Data for 2022
https://cryptorank.io/
IDO Data for 2022
Sidebar: “crypto asset” means a digital representation of value or contractual rights, which may be transferred and stored electronically, using distributed ledger or similar technology;
Sidebar: Designation orders (CMA Section 127) (paraphrased)
What's a crypto-token and what's special about it?
payments:
utility
stablecoins
governance
asset
derivatives
Disclaimer: this list in non-exhaustive, new ideas come up every day!
The Idea of a Token-Driven Flywheel
liquidity \(\nearrow\)
volume \(\nearrow\)
protocol fees \(\nearrow\)
token value \(\nearrow\)
Insight: protocols use tokens that have equity features as incentives to users
UniSwap Lab supports development
a website app accesses the code
token holders control contact features
don't own the code
operation = decentral
control = decentral
anyone can use the baseline code
core code runs on the blockchain
tokens used as rewards
Lessons?
Traditional economy
Decentralized economy
Traditional "centralized" economy
Chod and Lyandres (MS 2021):
Davydiuk, Gupta, and Rosen (2018)
Lee and Parlour (RFS 2022)
Malinova and Park (2018)
Shakhnov and Zaccaria (2022)
price
demand
marginal cost
marginal revenue
general idea: sell future output
two approaches for token sales
sell a fraction of future revenue
sell units of future output
price
demand
marginal cost
marginal revenue
Entrepreneur does not internalize the effect of an extra output unit on the token value for the tokenholders!
Result: overproduction
price
demand
marginal cost
marginal revenue
Result: underproduction
\(\Rightarrow\) shifts marginal revenue for entrepreneuer left because get only fraction of revenue
revenue sharing: underproduction
output presale: overproduction
\(c\)
\(MR\)
"does not internalize" = externality
address externality: TAX!
here: tax future token income
incremental token income gets shared
\(\Rightarrow\) combine the two to get the monopoly quantity!
Idea:
entrepreneur can influence expected demand
with effort
without effort
assume \[\textit{NPV}(\text{effort})>0>\textit{NPV}(\text{no effort})\]
Investors (equity or token holders) only finance the project if the entrepreneur undertakes the effort
Solve for the optimal funding conditional on the entrepreneur taking the effort
Derive conditions such that the entrepreneur undertakes effort
1.
2.
Key insight: a token contract incentivizes effort better than equity (similarly to canonical debt vs. equity insights)
Optimal token contract has debt features:
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 revenue-based ICO vs equity financing from the standard corporate finance + IO toolbox
Theorem 1: Without frictions, an optimal token contract finances the same projects as equity
Theorem 2: With entrepreneurial moral hazard,
By Andreas Park
This set of slides describes tokens as a form of financing of operations.