Nº 19-78: Optimal Financing with Tokens

We develop a unifying model of the optimal issuance and design of tokens in the presence of frictions typical to the financing of entrepreneurial projects, such as the need to raise outside funds to finance platform development and the ensuing agency conflicts between platform developers and outsiders. Tokens possess utility features when they serve as the transaction medium on the platform. They possess security features when they distribute dividends. The paper shows how the optimal provision of utility and security features relates to financing needs, moral hazard, and platform characteristics and specifies the conditions under which initial coin offerings or security token offerings are optimal for platform financing.