Financing inventory through initial coin offerings (ICOs)

Abstract

Initial Coin Offerings (ICOs) are an emerging form of fundraising for Blockchain-based startups. We propose a simple model of matching supply with demand with ICOs by companies involved in production of physical products. We examine how ICOs should be designed - including optimal token floating and pricing of utility tokens - in the presence of product risk and demand uncertainty, make predictions on ICO failure, and discuss the implications on firm operational decisions and profits. We show that in the current unregulated environment, ICOs lead to risk-shifting incentives (moral hazard), and hence to underproduction, agency costs, and loss of firm value. These inefficiencies, however, fade as product margin increases and market conditions improve.