- Agent optimization
- Market clearing
- Rational expectations




University of Michigan - Ann Arbor

In an initial coin offering, a venture gains financing by selling a stock of tokens to investors with the promise that the tokens would be the only medium of exchange to access the venture's products in the future.

Initial Coin Offering (ICO)

Catalini, Christian and Gans, Joshua S., Initial Coin Offerings and the Value of Crypto Tokens (March 5, 2019). MIT Sloan Research Paper No. 5347-18, Rotman School of Management Working Paper No. 3137213, Available at SSRN: https://ssrn.com/abstract=3137213 or http://dx.doi.org/10.2139/ssrn.3137213

Initial Coin Offerings 
and the Value of Crypto Tokens

Timeline of an ICO

- In traditional equity finance, a venture issues shares that are claims of the present value sum of future profits, the equity value is then determined by the trading price of those shares
- In ICOS's, tokens are not claims on future profits, instead they are related to the flow of future revenues. These flows of revenues will determine the future exchange rate of tokens against fiat currencies like the U.S dollar

Equity Finance vs. ICO's

- Regulatory characteristics of ICOs
- ICO risks and policy considerations
- Appropriateness of existing legal frameworks for ICOs

Regulation of ICOs

- Sale of tokens provides capital for initial development
- Lower cost of verifying transaction attributes
- Venture retains partial ownership of tokens to mitigate incentives to raise token denominated prices and under-supply their product
- The underlying codebase for the token is available as open-source software and by hardcoding the money supply schedule within the software protocol. 
- In order to change initial commitments of the project, a fork of the network is required which is only successful with the vast majority of the network and stakeholders supporting it

Benefits of ICOs

- Venture issuing tokens controls both their technological evolution as well as their monetary policy
- Venture cannot predict future demand for tokens and cannot credibly commit to a future token-denominated price
- If venture incurs additional costs to deliver products, they have incentive to set high token price to limit demand and economize on cost
- Venture cannot generate revenue until one period after the venture is launched, and there is great risk

Drawbacks of ICOs

One third of all Initial Coin Offering (ICO) funding went to US-based teams, and more than 200 ICOs raised above \$10 million. Since 2017, startups have raised over \$7 billion through initial coin offerings.

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