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Financial incentives for open source development: the case of Blockchain

Canidio, Andrea (2018): Financial incentives for open source development: the case of Blockchain.

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Abstract

Unlike traditional open-source projects, developers of open-source blockchain-based projects can reap large financial rewards thanks to a modern form of seignorage. I study to what extent this novel form of financing generates incentives to innovate. I consider a developer working on an open-source blockchain-based software that can be used only in conjunction with a specific crypto-token (itself a piece of open-source software). This token is first sold to investors via an Initial Coin Offering (ICO) and then traded on a frictionless financial market. In all equilibria of the game, in each post-ICO period there is a positive probability that the developer sells all his tokens on the market and, as a consequence, no development occurs. Anticipating this, the developer will hold the ICO only when his own funds are insufficient to sustain the development of the software. The equilibrium of the game is, in general, inefficient.

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