Working Paper: NBER ID: w24418
Authors: Christian Catalini; Joshua S. Gans
Abstract: This paper explores how entrepreneurs can use initial coin offerings — whereby they issue crypto tokens and commit to only accept those tokens as payment for their products — to fund venture start-up costs. We show that the ICO mechanism allows entrepreneurs to generate buyer competition for the token, giving it value. We also find that venture returns are independent of any committed growth in the supply of tokens over time, but that initial funds raised are maximized by setting that growth to zero to encourage saving by early participants. Nonetheless, since the value of the tokens depends on a single period of demand, the ability to raise funds is more limited than in traditional equity finance. Furthermore, a lack of commitment in monetary policy undermines saving behavior, hence the cost of using tokens to fund start-up costs is inflexibility in future capital raises. Crypto tokens can also facilitate coordination among stakeholders within digital ecosystems when network effects are present.
Keywords: Initial Coin Offerings; Crypto Tokens; Entrepreneurial Financing
JEL Codes: E42; L12; L26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ICOs allow entrepreneurs to generate buyer competition for tokens (L13) | Tokens gain value (D46) |
| Buyer competition for tokens (D44) | Higher perceived value of tokens (D46) |
| Venture returns are independent of committed growth in the supply of tokens over time (D25) | Ability to raise funds through ICOs is constrained (G24) |
| Lack of commitment in monetary policy (E49) | Undermines saving behavior (D15) |
| Cost of using tokens for startup funding (G24) | Inflexibility in future capital raises (G32) |
| Inflexibility in future capital raises (G32) | Constraints in raising follow-on capital through the same mechanism (G24) |