Financing Product Development Projects in the Blockchain Era: Initial Coin Offerings Versus Traditional Bank Loans

Abstract

Nowadays, supported by the blockchain technology, initial coin offering (ICO) has emerged as a way to finance projects via crowdfunding. In this article, by building stylized theoretical models, we examine the product development project financing problem under the traditional bank case (Model TBK) and ICO case (Model ICO). Under a commonly used demand function in which product quality scales the price-dependent market demand, we theoretically derive and compare the optimal pricing and quality decisions for the project under both models. We identify the feasible conditions, which govern the feasibility of each financing model. We then develop the optimal rule, in the form of an algorithm, to determine the optimal financing choice. To show the robustness of the results and test the impacts of having a different form of demand function, we examine in the extended models the case when demand function is linear-additive to both price and quality. We find that the major results derived from the main models scenario remain valid in the extended models scenario. Some interesting subtle differences between the two models are also revealed. We conclude by highlighting that the two financing modes (TBK and ICO) are very different and have a substantial impact on the optimal pricing and quality decisions as well as the start-up company's profitability.