CESC2020: Initial Coin Offerings As a Commitment to Competition

Hi everyone, welcome to CSC. Thank you so much for inviting me to talk about my work at this really incredible conference so I am my name is E-Check of that. I'm a professor of Finance at Carnegie Mellon University and the paper that I'm going to talk about is quartered with etai Goldstein, Andrew son. Sure. Cause I was at the Wharton School in this paper and initial coin offering and we're going to talk about a mechanism where tokens that are sold in initial coin offering their Century away for

entrepreneurs to commit to competition and giving up Monopoly Vin. So there's an open question of what the future of initial coin offering is going to be the Ico Market, really grew rapidly from 2016, through the beginning of 2018. There was a lot of excitement about this Market. Proponents of ico's were wondering if they were going to replace the big technology Giants of the time. If they were going to distract The Venture Capital Market, and we saw a lot of activity in the Ico Market. I'm just Market really grew rapidly from 2016

through the beginning of 2018 to give you a just a sense of some numbers. In 2016 52 initial coin offering raised about 283. Millions with very small Market at the time. And in 2018, really less than two years later over 3,800 ico's rate close to Thirty billion dollars. It was almost 90 per-cent of the size of the initial public offering Market that year. Who's it's huge Clarion. I see you activity and was really exciting, but then in the beginning of 2018, the activity started slowing down.

So here I'm just showing you a graph from the token are lions which is essentially graphing, the number of successful Ico projects or the number of Ice Cube projects that raised at least $25,000 in funding. And you notice that, you know, this is the increase in activity from 2016 to 2018, but starting in 2018, we see almost as dramatic of fall in the number of ICU is on the market virtually disappears in 2019. Food. Future of initial coin offering is quite uncertain. They are some people incredibly negative about the market, they have been labeled as

scams the 2017. 2018. Scribe does a bubble. So, there's a question of, is there any future for this Market? Is there youth case to be made for initial coin offering? When was the simply just a bubble? And in this paper we are we are we showed that utility tokens which essentially the bread-and-butter or finish a coin. Offering markets can improve the efficiency of two-sided marketplaces with network effects and essentially this is because tokens utility token of the type that are typically issued, an initial coin offering

can actually help entrepreneurs commit to giving up Monopoly and oligopoly. Rent and 2 competitive pricing off services on their platform. So what do I mean? When I say two-sided, marketplaces with network effects, essentially, I'm thinking about hear about marketplaces which can match buyers and sellers. Do you think we have buyers were looking to purchase a good or service? You have many sellers who are looking to sell that good or service, and this is a platform that matches the two. The idea is that you make this matching really efficient? Do I do

you want a large number of fires on a large number of salads. And so these are natural monopolies and all the matching kind of matching the two because their Network effects of having sore for a large number of fires and a large number of Sellers and a lot of sort of big companies in applications are probably we all use can be characterized as being two sides and marketplaces with network effects. So think about Hoover Air Lift Air B&B What is generating Monopoly power here, essentially for matching kind of

buyers and sellers it's quite efficient to have a single platform. There does does the think about ride-sharing apps if you're looking for a right you don't want to download a hundred different ride-sharing application and open up all of them. When you need a ride comparing the prices and wait times across them. You might open one or two maybe three but you really don't want to look at many more than that. Also, it's a tradition to have everyone on the same platform, right? If you have a large number of drivers and a large number of riders, when a writer is

looking for a driver is going to allow you to match them with the closest drive-thru in optimizing with time and it's going to help your drivers have constant business. They're not going to have to drive around looking for customers that often if you have a lot of writers on your platform. So, ideally in these types of marketplaces, we really want all users on the same network. The problem with this is obvious, if we have a single platform, it's going to generate Monopoly power and vents. So if you only in a world in which you only had buber relative to a world in which we can brand lift,

the prices are, the prices are paying parade are probably going to be higher. If you only had we were and you didn't have lift, right? So competition is going to benefit users are products in terms of getting better pricing. So ideally, we want a single platform. So we can maximize Network effects of everyone being on the same platform, but we also want some competitions. We also want competitive pricing When we show him this paper is that disconnects we be achieved through utility tokens and the basic

are they going to be 3 features? That are important for something to qualify as a token which can help solve this problem if needs to be the sole kind see on the platform. So, if you think again about a ride sharing platform, essentially you would have a token where tokens are going to be exchanged for rides or if it would be essentially, the Carnes be on the platform, we require a secondary market for tokens Dale's. So again, if this is the right train platform, someone who is looking for a ride is going to be able to go to an exchange exchange, their fifth coin,

ethereum USD, whatever have you for that token, then take that token, pay it to the driver and the driver, then should be able to go back to that secondary market and exchange. That's open that they received as payment for their ride, for Whatever currency you, they're going to be able to buy other Goods, then. And the three thing we require is that these tokens are issued in a fixed in six Supply. All three of these are typical features off utility token and easily implementable through blockchain technology. So what I'm going

to do is just run through the to give you a sense of the basic mechanism and going to run through an incredibly simple example. I'm thinking about how to Atkins can help improve efficiency in a ride. So let's see, we have two potential readers who are valuing the same rights are both of them need to go from point A to point B, the same time every day and they said they both value, this ride value differently. The first Rider really cares about being able to take the ride and lie, value the right at $15 but the second one. A little bit less about the right.

So they're only willing to pay $10 for the same ride. So these two potential Riders were looking for a ride and then we have many drivers who can each provide this, right? At a cost of $10 per ride, every day for the cost of providing, the right is $10. Now let's think about it this for a second. If we don't have a matching problem and we just had a competitive market. What would happen essentially in a competitive market because we have two people who are looking for guys and willing to pay at least the cost of what it cost to drivers to provide the ride and have many

many drivers. Recently, the cost of right is just going to be $10, right? The drivers are going to compete with each other and they're going to offer their ride for $10 at this price. Both Riders will be willing to buy a ride and they're going to get a ride every single day. Now, what is the drivers and the writers contest direct, we match with each other, so let's see. We have a hypothetical ride-sharing platform ride X, which can essentially match writers were looking for rides with drivers. Who can provide the right? No, because right X

is handling the matching. The idea is that Britax here is going to be able to determine what price of wants to charge for each ride. The writers could think. Okay. Let me charge $10 a ride. If I charge $10 a night which is a competitive price, I'm going to be able to sell to ride because both the Riders are going to buy the ride. Then I'm going to have to pay the drivers $10 because that's their cost of providing the right to them, anything less they wanted me to provide the ride. So my profit in this case is just going to be 0. Alternatively Vitex could think, well I

can charge $15 a ride in this case. I won't sell to ride. The only saw the one ride to the writer who values it at $15. I can see my driver $10 and I can profit five. I can make a profit of $5, of course, right. If he's going to choose the second option, they're going to prefer to make a profit of $5 everyday instead of making no profit. And then you're going to charge $15 a ride that one, rated E and make a profit of $5 every day. There's an issue and inefficiency here due to the Monopoly power relative, to what we saw in the competitive market where remember the

price was $10. And two rides were sold every day. So essentially have a higher price per ride because of the Monopoly. Power and less rights are going to be sold every single day. So how can a utility token, help increase the fit, increase efficiency in the scenario. Let's see, right? We have a ride X token and the idea is that this is going to operate like a utility token in initial coin offering market. So Riders can buy Rite X tokens on an exchange. Build and take those tokens and paid a driver

one ride exit. Open in exchange for the ride and the driver who get this right X token in exchange for the right should be able to go to The Exchange and sell their products token. Maui Friday Street to token. Let's think about what happens on the first day, right? Axle has created to tokens, and it owns all the tokens, So you could choose to charge $15 for its tokens on the exchange on day. One remember right? Acts as the only person who owns any tokens to the essentially get to set the price of

tokens on the exchange. If you charge $15 for token on the first day, only the writer who values the right at $15 is going to buy the token. So right X is going to be able to sell one token, one writer is going to the right or values that are $15. They're going to go and buy this token. They're going to pay their driver, the toe in the token and they're going to take the right. And what's going to happen on the second day, I still have one token to sell. but, The driver who was paid in the token on the first day also has a token that

they would like to sell on the exchange so right and the driver is actually going to compete with each other. And that means, right? It will no longer be able to charge $15 for their tokens because there's competitions Exchange price. For each token is going to drop to $10. A $10 both of the potential Riders are going to be happy to buy the token. They're both going to take a ride there both and they're going to pay their driver in the token. On day three, right X. Now has no man. Has no more tokens. It's been tits to Tolkien

The two drivers who receive tokens on day two at payment will both failed. Their tokens on the exchange again because they're two different rides are selling their tokens. There's going to be competition and the price is going to stay at $10. Sorry, I didn't hear this is different from when write-ups. Remember when, right? It's was working as a monopolist, it was able to charge $15 every single day for a ride now, right? It's can only charge $15 for a token once they can profit on day one. But on D2, that token is now in the hands of a

driver who's going to compete for drydex on the exchange, write-ups can no longer keep charging $15 but price is eventually just going to fall to the competitive price. The key idea here is that tokens are going to create a limited stock of Market power. Each time write at once to sell some tokens to monetize them, it's essentially it's essentially guaranteeing that it's going to face subsequent competition with each time, right? Excels. A token. That token is eventually going to make its way into the hands of the

driver who's been going to go on the exchange and compete with right X. Ensign tax because of this is only going to be able to profit from each token one. Not every consumer is going to be able to buy a ride immediately. So the simple example, I walked you through the consumer who value the right at $10, wasn't able to start buying rides until the second day. So not even consumers going to be able to buy a ride, it immediately. But eventually Surplus is going to be maximizing equal to the competitive level with everyone who values a ride at at or more than the cost of providing that tried

being able to get a ride. Obviously the former do it, which is in our paper, is much more complicated. It's a lot more General. But this example, really captures the key intuition of white oak and generate a commitment to eventually getting to a competitive price. So the last thing I didn't want to talk to you about is well why choose an initial coin offering so the exam play walk you through? It didn't make sense that an initial clean off as if you have an initial coin offering, you might be able to disrupt a market please, which has a monopolist. But

let's be an entrepreneur, has a new technology. Would they ever choose to have 50 average? Is having an issue rather than simply operate, as a monopolist? We talked about this question in the paper quite a bit, in the basic idea. Is that an entrepreneur? Me actually prefer to commit to competitive pricing through having an initial coin offering rather than operating as a monopolist. And there's a few different reasons that this might be true. So, again, if you think about the example of uber versus Lyft, if we have two

platforms that are competing users are essentially going to be split across both. And the fact that who bring this compete with each other, like we is going to lower the price of a ride, but we're going to have to split off users across different platforms. Ideally, we'd all like to be on the same platform, but if we all chose to only use Uber only use Lyft in all probability the price that we would be paying for rides with increase, which is why that's really not going to have to happen. But if you have this token as an entrepreneur is essentially going to allow you to

commit to keeping the price of your service low, it's going to allow you to commit to competitive pricing and this could credibly help you build a bigger Network. Did this might be one reason that an entrepreneur might actually prefer to have an initial coin offering because it can help discourage entry since you was already committed to lowering the price of the service or good on your platform. There's not really a reason. Why an infant is going to be able to get market share from you. Another potential reason, even if only one big

company could survive is that essentially because having tokens is going to allow us to get to the competitive, aqualibrium total Surplus with tokens is much higher than the Surplus without token under a simple monopolist. So consumers may actually prefer to. They may want to try to identify the entrepreneur to operate with token by compensating. The entrepreneur resource overpaying for tokens during the initial coin offering to essentially. Because we prefer to have competitive pricing, going forward that we want to think about creating incentives for the

entrepreneur to actually choose to have an initial coin offering to begin with by compensating them. Make me leave over paying a little bit for tokens, initially to essentially compensate, the entrepreneur for the Lost friends. For the events that they would lose by operating as a monopolist. So I may just conclude in our paper. We showed that initial coin offering might actually be very useful because their mechanism can help improve Welfare by generating a commitment to competitive pricing, really motivated by the fact that Network effects which is true of

so many applications that are widely used these days, give rice to Natural monopolies on oligopolies. Potentially. We think that it's potentially our mechanism is Big applications and can help entrepreneurs with Market. Power commit to competitive pricing, and improving consumer welfare, going forward, That's all I have for you. Thank you so much.