Financing Platforms With Cryptocurrency: Token Retention, Sales Commission, and ICO Caps

Authors

Rowena Gan, Southern Methodist University (SMU) - Information Technology and Operations Management Department (ITOM)Follow
Gerry Tsoukalas, University of Pennsylvania - The Wharton School; Boston University; Luohan AcademyFollow
Serguei Netessine, The Wharton School, University of PennsylvaniaFollow

Publication Date

8-1-2022

Abstract

Centralized platforms (e.g., Uber) rely primarily on sales commission (aka, service fees) to generate revenues whereas decentralized blockchain-based startups (e.g., Filecoin) often forego these in favor of token retention. We show that both levers help to overcome moral hazard and incentivize platform building, but they aren't perfect substitutes and imply a strategic trade-off: the commission approach generally leads to higher long-term profits for the platform founders, whereas token retention can lead to higher service levels, benefiting the service providers and users. Furthermore, the two levers also require different ICO designs when raising capital: commission works best when paired with uncapped ICOs (i.e., unlimited token supply) whereas token retention works best with capped ICOs under certain conditions. These findings offer some guidance and explanations for the operating and ICO design choices of decentralized platforms.

Document Type

Article

Disciplines

Business Administration, Management, and Operations

DOI

10.2139/ssrn.3776411

Source

SMU Cox: IT & Operations Management (Topic)

Language

English