Tokenomics: When Tokens Beat Equity

Author:

Malinova Katya1ORCID,Park Andreas2ORCID

Affiliation:

1. DeGroote School of Business, McMaster University, Hamilton, Ontario L8S 4E8, Canada;

2. University of Toronto Mississauga and Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada

Abstract

In a token offering, investors fund a venture in exchange for tokens that grant rights to future economic output. To many financial industry insiders, tokens have no intrinsic merit and exist only as a way to evade regulations. We demonstrate that generic revenue-based token contracts are indeed economically inferior to equity and lead to over- or underproduction. However, an optimally designed token contract, which is a combination of an output presale and an incremental revenue-sharing agreement, yields the same payoffs as equity and debt. Moreover, with entrepreneurial moral hazard, tokens can finance a strictly larger set of ventures than equity.This paper was accepted by Will Cong, Special Section of Management Science: Blockchains and Crypto Economics.Funding: This work was supported by the Social Sciences and Humanities Research Council of Canada and Canadian Securities Institute Research Foundation [Grants 20013075 and 435-2017-064]. Financial support from the Global Risk Institute and the Mackenzie Investment Chair in Evidence-Based Decision Making is also acknowledged.

Publisher

Institute for Operations Research and the Management Sciences (INFORMS)

Subject

Management Science and Operations Research,Strategy and Management

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