‘Initial Coin Offerings, Speculation and Asset Tokenization’
by Gerry Souk
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Initial Coin Offerings (ICOs) are an emerging form of fundraising for Blockchain-based startups. We examine how ICOs can be leveraged in the context of asset tokenization, whereby firms issue tokens backed by future assets (i.e., inventory) to finance growth.
We (i) make suggestions on how to design such “asset-backed” ICOs—including optimal token floating and pricing for both utility and equity tokens (aka, Security Token Offerings, STOs)—taking into account moral hazard (cash diversion), product characteristics and customer demand uncertainty, (ii) make predictions on ICO success/failure, and (iii) discuss implications on firm operating strategy.
We show that in unregulated environments, ICOs can lead to significant agency costs, underproduction, and loss of firm value. These inefficiencies, however, fade as product margins and demand characteristics (mean/variance) improve, and are less severe under equity (rather than utility) token issuance. Importantly, the advantage of equity tokens stems from their inherent ability to better align incentives, and thus continues to hold even absent regulation.
The paper is joint work with Daniel Bias, Ben Lochner, and Merih Sevilir.
Bio: Gerry Tsoukalas is an assistant professor at the Wharton School at the University of Pennsylvania, teaching the Wharton MBA core in Business Analytics, as well as graduate and undergraduate-level electives in advanced Mathematical Modeling (with applications in finance).
His research examines how technology impacts firm operating strategy and financing. Recent areas of application include how to optimally design and operate blockchain and fintech platforms. His work has appeared in leading academic journals, including Management Science, Operations Research, and M&SOM. He serves on the editorial boards of Management Science, and M&SOM, as Associate Editor.