Abstract
This paper considers a financing problem for an innovative firm that is considering launching a web-based platform. Our model is the first one that analyzes an entrepreneur's choice between security tokens (via a security token offering (STO)) and utility tokens (via initial coin offering (ICO)). The entrepreneur on one hand faces a large degree of demand uncertainty on his product and on the other hand has to deal with incentive problems of professional blockchain participants who contribute to the development and sales of the product. We argue that utility tokens with profit rights are a better option for the firm compared to straight utility tokens or security tokens because they help the firm better deal with both the moral hazard problems (via profit sharing incentives) and demand uncertainty (they help the firm learn the product demand). This finding is consistent with some recent evidence. The paper also generates new predictions that have not been tested so far.
Highlights
Introduction under Moral Hazard and DemandInnovative companies account for a significant share of the global market for human capital but they are often constrained in their growth potential as they have difficulty accessing capital markets (Hall 2009; Wilson 2015)
(1) For a given value of s and v, if ∆F is sufficiently small than the results are not affected, that is, security token offerings (STOs) is better than initial coin offerings (ICOs) under moral hazard problem; (2) for a given value of s, there exists v∗ such that STO is better than ICO if and only if v > v∗ ; (3) for a given value of v, there exists a U—shape relationship between s and the firm choice between STO and ICO, that is, STO is better than ICO if s is either very small or very large
This article offers a new model of the choice between an ICO and an STO for an innovative firm looking to fund the development of its platform
Summary
Innovative companies account for a significant share of the global market for human capital but they are often constrained in their growth potential as they have difficulty accessing capital markets (Hall 2009; Wilson 2015). In a typical ICO, an entrepreneur raises capital by selling utility tokens, which give their owners the right to use the company’s product or service once it is developed. A firm’s success in these innovative areas crucially depends on the incentives and efforts of the firm itself but on the many participants involved These efforts include validating transactions (often referred to as “mining”) on a blockchain ledger that involves different types of operational costs (e.g., labour, computers, energy etc.), as well as the project development costs such as marketing and technology development. Utility tokens give the right to purchase a product or service on the platform while security tokens give a right on firm profit. Usage of utility tokens helps the firm to learn the demand and improve its decision-making including production (pricing) decisions.
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