Financial incentives for the development of blockchain-based platforms

Canidio, Andrea (2018): Financial incentives for the development of blockchain-based platforms.

Abstract

A developer creates a new blockchain-based decentralized digital platform by investing resources and exerting costly effort. Performing exchanges on the platform is possible only by using a new crypto-token. The initial stock of this token is owned by the developer, who can sells some in an Initial Coin Offering (ICO), and more later on a frictionless financial market. I show that, if the developer raises funds via an ICO, then in every subsequent period with strictly positive probability he may liquidate his tokens and stop the development of the platform. Even if the developer does need to hold an ICO, the equilibrium will nonetheless be inefficient because the developer's payoff depends on the volume of transaction on the decentralized digital platform in each period. Instead, the social value of the platform depends on the present discounted value of the total surplus created. The developer's effort and investment could be above or below their optimal levels, depending on the discount factor and the elasticity of supply/demand of the users of the platform.

• Item Type: MPRA Paper
• Language: English
• Keywords: Blockchain, decentralized digital platforms, Initial Coin Offering (ICO), Tokenomics, seigniorage, innovation, incentives, open source.
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L17 - Open Source Products and Markets; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L26 - Entrepreneurship; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives

References

Amsden, R. and D. Schweizer (2018). Are blockchain crowdsales the new’gold rush’ ? success determinants of initial coin offerings. working paper .

Athey, S., I. Parashkevov, V. Sarukkai, and J. Xia (2017). Bitcoin pricing, adoption, and usage: Theory and evidence. SIEPR working paper.

Bakos, Y. and H. Halaburda (2018). The role of cryptographic tokens and icos in fostering platform adoption. working paper .

Benabou, R. and J. Tirole (2003). Intrinsic and extrinsic motivation. The review of economic studies 70 (3), 489–520.

Biais, B., C. Bisiere, M. Bouvard, and C. Casamatta (2018. The blockchain folk theorem. Technical report.

Budish, E. (2018). The economic limits of bitcoin and the blockchain. Technical report, National Bureau of Economic Research.

Canidio, A. (2020). Cryptotokens and cryptocurrencies: the extensive margin. working paper .

Catalini, C. and J. S. Gans (2016). Some simple economics of the blockchain. Technical report, National Bureau of Economic Research.

Catalini, C. and J. S. Gans (2018). Initial coin offerings and the value of crypto tokens. Working Paper 24418, National Bureau of Economic Research.

Chod, J. and E. Lyandres (2018). A theory of ICOs: Diversification, agency, and information asymmetry.

Cong, L. W., H. Li, and N. Wang (2019). Token-based corporate finance. working paper .

Cong, L. W., Y. Li, and N. Wang (2018). Tokenomics: Dynamic adoption and valuation. working paper .

DeMarzo, P. M. and B. Urošević (2006). Ownership dynamics and asset pricing with a large shareholder. Journal of political Economy 114 (4), 774–815

Dimitri, N. (2017). Bitcoin mining as a contest. Ledger 2, 31–37.

Easley, D., M. O’Hara, and S. Basu (2019). From mining to markets: The evolution of bitcoin transaction fees. Journal of Financial Economics 134 (1), 91–109

Gans, J. S. and H. Halaburda (2015). Some economics of private digital currency. In Economic Analysis of the Digital Economy, pp. 257–276. University of Chicago Press.

Garratt, R. and M. R. van Oordt (2019). Entrepreneurial incentives and the role of initial coin offerings. working paper

Garratt, R. and N. Wallace (2018). Bitcoin 1, bitcoin 2,....: An experiment in privately issued outside monies. Economic Inquiry 56 (3), 1887–1897.

Goldstein, I., D. Gupta, and R. Sverchkov (2019). Initial coin offerings as a commitment to competition. Available at SSRN 3484627 .

Howell, S. T., M. Niessner, and D. Yermack (2018). Initial coin offerings: Financing growth with cryptocurrency token sales. Technical report, National Bureau of Economic Research.

Huberman, G., J. D. Leshno, and C. C. Moallemi (2017). Monopoly without a monopolist: An economic analysis of the bitcoin payment system. CEPR discussion paper.

Lerner, J. and J. Tirole (2002). Some simple economics of open source. The journal of industrial economics 50 (2), 197–234.

Li, J. and W. Mann (2018). Initial coin offering and platform building. Working paper.

Lyandres, E., B. Palazzo, and D. Rabetti (2018). Do tokens behave like securities? an anatomy of initial coin offerings. Working Paper .

Ma, J., J. S. Gans, and R. Tourky (2018). Market structure in bitcoin mining. Technical report, NBER working paper.

Malinova, K. and A. Park (2018). Tokenomics: when tokens beat equity. Working paper .

Nakamoto, S. (2008). Bitcoin: A peer-to-peer electronic cash system. https://bitcoin.org/bitcoin.pdf. (last accesed April 20, 2020).

OECD (2017). Venture capital investments. In E. O. Paris (Ed.), Entrepreneurship at a Glance 2017.

Prat, J., V. Danos, and S. Marcassa (2019). Fundamental pricing of utility tokens. working paper .

Prat, J. and B. Walter (2018). An equilibrium model of the market for bitcoin mining. Technical report, CESifo Working Paper.

Schilling, L. and H. Uhlig (2018, April). Some simple bitcoin economics. Working Paper 24483, National Bureau of Economic Research.

Sockin, M. and W. Xiong (2018). A model of cryptocurrencies. Working paper.