Abstract
This paper considers a financing problem for an innovative firm that is launching a web-based platform. 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 hybrid tokens can be 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 market demand for the product). This finding is consistent with some recent evidence. The paper also generates new predictions regarding the effect of different variables on the choice of financing method that have not yet been tested.
Highlights
Literature Reviewinitial coin offerings (ICOs) and security token offerings (STOs) research is quickly growing. Chen et al (2021); Bellavitis et al (2020); Miglo (2021); Howell et al (2018); Adhami et al (2018) provide good reviews of the literature in this field
Introduction vsinitial coin offerings (ICOs): A Theory of Token IssuesInnovative 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 ICO 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
Summary
ICO and STO research is quickly growing. Chen et al (2021); Bellavitis et al (2020); Miglo (2021); Howell et al (2018); Adhami et al (2018) provide good reviews of the literature in this field. Token issues fall naturally in this line of research since by definition an ICO, for example, does represent a financing tool for a firm and is an important part of its sales and respectively a part of its marketing strategy and so forth. Between the 1950s and 1990s the works of several leading financial researchers (Modigliani and Miller 1958; Jensen and Meckling 1976; Myers and Majluf 1984, etc.) led to the development of many important concepts in the area of firm financing including asymmetric information, moral hazard, debt tax shield, bankruptcy costs and so forth. Our paper contributes to these development by suggesting a model with all three mentioned previously aspects of firms strategy including financing operations, production decisions and monetary aspects of firm’s policy
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