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Optimal financing with tokens

Author

Listed:
  • Gryglewicz, Sebastian
  • Mayer, Simon
  • Morellec, Erwan
Abstract
We develop a model in which a start-up firm issues tokens to finance a digital platform, which creates agency conflicts between platform developers and outsiders. We show that token financing is preferred to equity financing unless the platform expects strong cash flows, has large financing needs, or faces severe agency conflicts. Tokens are characterized by their utility features, facilitating transactions, and security features, granting cash flow rights. While security features trigger endogenous network effects and spur platform adoption, they also dilute developers’ equity stake and incentives so that the optimal level of security features decreases with agency conflicts and financing needs.

Suggested Citation

  • Gryglewicz, Sebastian & Mayer, Simon & Morellec, Erwan, 2021. "Optimal financing with tokens," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1038-1067.
    • Handle: RePEc:eee:jfinec:v:142:y:2021:i:3:p:1038-1067
    DOI: 10.1016/j.jfineco.2021.05.004
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Yuxuan Lu & Qian Qi & Xi Chen, 2023. "A Framework of Transaction Packaging in High-throughput Blockchains," Papers 2301.10944, arXiv.org.
    2. Anton Miglo, 2022. "Choice between IEO and ICO: Speed vs. Liquidity vs. Risk," FinTech, MDPI, vol. 1(3), pages 1-18, September.
    3. Rodney Garratt & Maarten RC van Oordt, 2024. "Crypto Exchange Tokens," BIS Working Papers 1201, Bank for International Settlements.
    4. Roman Kräussl & Alessandro Tugnetti, 2024. "Non‐Fungible Tokens (NFTs): A Review of Pricing Determinants, Applications and Opportunities," Journal of Economic Surveys, Wiley Blackwell, vol. 38(2), pages 555-574, April.
    5. Zhang, Xu & Naeem, Muhammad Abubakr & Du, Yuting & Rauf, Abdul, 2024. "Examining the bidirectional ripple effects in the NFT markets: Risky center or hedging center?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 41(C).
    6. Anton Miglo, 2022. "Theories of Crowdfunding and Token Issues: A Review," JRFM, MDPI, vol. 15(5), pages 1-28, May.
    7. Anton Miglo, 2023. "ICO vs. Equity Financing under Imperfect, Complex and Asymmetric Information," FinTech, MDPI, vol. 3(1), pages 1-23, December.
    8. Mayer, Simon, 2022. "Financing breakthroughs under failure risk," Journal of Financial Economics, Elsevier, vol. 144(3), pages 807-848.
    9. Kanis Saengchote, 2022. "Decentralized lending and its users: Insights from Compound," Papers 2212.05734, arXiv.org.
    10. Maarten R.C. van Oordt, 2024. "On Bubbles in Cryptocurrency Prices," Tinbergen Institute Discussion Papers 24-050/IV, Tinbergen Institute.
    11. Guangye Cao, 2024. "Token vs Equity for Startup Financing," Papers 2402.04662, arXiv.org.
    12. Andrea Canidio, 2023. "Auctions with Tokens: Monetary Policy as a Mechanism Design Choice," Papers 2301.13794, arXiv.org, revised Aug 2023.
    13. Saengchote, Kanis, 2023. "Decentralized lending and its users: Insights from compound," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 87(C).
    14. Bhambhwani, Siddharth M. & Huang, Allen H., 2024. "Auditing decentralized finance," The British Accounting Review, Elsevier, vol. 56(2).
    15. Cong, Lin William & Mayer, Simon, 2022. "The Coming Battle of Digital Currencies," Applied Economics and Policy Working Paper Series 320020, Cornell University, Department of Applied Economics and Management.
    16. Evgeny Lyandres & Berardino Palazzo & Daniel Rabetti, 2022. "Initial Coin Offering (ICO) Success and Post-ICO Performance," Management Science, INFORMS, vol. 68(12), pages 8658-8679, December.

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    More about this item

    Keywords

    Coin offering; Security tokens; Optimal financing; Agency conflicts;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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