Entrepreneurial Incentives and the Role of Initial Coin Offerings

Abstract

Initial coin offerings (ICOs) are a new mode of financing start-ups that saw an explosion in popularity in 2017 but declined in popularity in the second half of 2018 as regulatory pressure, instances of fraud and reports of poor performance began to undermine their reputation. We examine whether ICOs are a passing fad or a worthwhile form of financing with beneficial economic properties. We do so by examining how financing a start-up through an ICO changes the incentives of an entrepreneur relative to debt and venture capital financing. Depending on market characteristics, an ICO can result in a better or worse alignment of the interests of the entrepreneur and the investors compared with conventional modes of financing. Notably, an ICO can be the only form of financing that induces optimal effort and hence maximizes the net present value of the start-up, and there are projects that should not take place at all unless they can be financed through an ICO.

STO vs. ICO: A Theory of Token Issues under Moral Hazard and Demand Uncertainty

“…Most papers are focused on ICOs. Theoretical papers on ICOs include, among others, Canidio (2018); Catalini and Gans (2018); Bakos and Halaburda (2018); Cong et al (2018); Li and Mann (2018); Lee and Parlour (2020); Chod and Lyandres (2019); Garratt and van Oordt (2019); Holden and Malani (2019); Miglo (2020d). 4 Research on STOs is in its early stages and it includes Gan et al (2020) and several empirical papers (e.g., Adhami et al 2018;Ante and Fiedler 2019;Lambert et al 2020).…”

Payments on Digital Platforms: Resiliency, Interoperability and Welfare

“…A more closely related research area focuses on the design of utility tokens issued by platforms and the value of initial coin offerings as a mode of financing, e.g., Catalini and Gans (2018), Cong, Li, and Wang (2020), Howell, Niessner, and Yermack (2020), Garratt and Van Oordt (2019), Sockin and Xiong (2020), and You and Rogoff (2019). Gans and Halaburda (2015) study the design of private digital currencies from a platform-management perspective and explain why a profit-maximizing platform may choose to limit the functionality of digital currencies.…”

ICO vs. Equity Financing Under Imperfect, Complex and Asymmetric Information

“…ICO research is also quickly growing. Theoretical papers on ICOs include, amomg others, Catalini and Gans (2018), Li and Mann (2018), Govindan and Wilson (2009), Bakos and Ha laburda (2018), Cong and Wang (2018), Garratt and van Oordt (2019) and Lee and Parlour (2018). No paper is focused on the choice between ICO and traditional equity …nancing eventhough for many entrepreneurs this issue seems to be very important.…”