3_halaburda_tokens-platforms_A.pdf

PLATFORM ECONOMICS AND BLOCKCHAIN TECHNOLOGIES

new platform design choices enabled by blockchain technologies

old problems in platforms

old problems in platforms – network effects

I platforms create value by bringing together users =⇒ network effect

I thus potential users want to join if and only if others join as well

1 network effects make it difficult to enter the market

2 create powerful intermediaries extracting value from the system

2 create powerful intermediaries extracting value from the system
blockchain technologies
I focus on tokens enabled by blockchains and smart contracts

PLATFORM ECONOMICS AND TOKENS
utility tokens make entry easier

governance structures enabled by governance tokens allow for more
value creation and more equitable value distribution

but...

but... each comes with its caveats

but... each comes with its caveats
tokens may alleviate, but do not fully remove traditional concerns

ENTRY PROBLEM FOR PLATFORMS
network effect
=⇒ potential users want to join if and only if others join as well

network effect
leads to multiplicity of equilibria

network effect
1 everybody adopts because they believe that everybody else adopts

network effect
2 nobody adopts because they believe that nobody else adopts

network effect
long history: Katz and Shapiro (1985), Caillaud and Jullien (2001,
2003), Rochet and Tirole (2003, 2006)

network effect
classic solution: subsidy

network effect
subsidize early users, and profit from those who join later, when it is
clear that the platform is successful

network effect
subsidize early users, and profit from those who join later, when it is
clear that the platform is successful
I problem: this requires upfront capital, which can be expensive and
creates barriers to entry

UTILITY TOKENS vs SUBSIDY
utility token = platform access

user who exits the platform can resale the token

I allows to increase price (and profit) on the entry
=⇒ may eliminate need for subsidizing

I lowers the profit in the future

F platform sells fewer tokens in the future, as earlier tokens are circulating

F token resale lowers the price (compared with pure subsidy)

tokens redistribute welfare from the platform to the users

overall welfare and platform profit lower

overall welfare and platform profit lower
I resale encourages user exit
I overall network smaller in the future

UTILITY TOKENS AND PLATFORM ENTRY
Can utility tokens issued on blockchain help overcome the coordination
problem for new platforms?

tokens make it possible to reduce or eliminate early user subsidy

I they move revenue from second period to first period

with no cost of capital, the overall profits are lower with tokens than
with subsidy

with subsidy
I resale possibility decreases the network size in the future if successful

with subsidy
when no access or cost of capital is high, tokens are more attractive

with subsidy
when no access or cost of capital is high, tokens are more attractive
important: platform can commit to accepting the tokens in the future

GOVERNANCE TOKENS & VALUE CREATION AND DISTRIBUTION
daos promise to prevent value-capture by powerful intermediaries, by
I decentralization

I decentralization
I disintermediation

I decentralization
I disintermediation
I distribution the value otherwise captured by intermediary

I decentralization
I disintermediation
I in permissionless environment

I decentralization
I disintermediation
we show that it happens only for narrow conditions

I decentralization
I disintermediation
we show that it happens only for narrow conditions
otherwise, natural centralization forces will make it difficult, if not
impossible in the long term
I additional safeguards needed

SIMPLE ENVIRONMENT
there are n potential users

SIMPLE ENVIRONMENT
who have varying utility from participating, uk = k,
with k distributed uniformly on [0, 1]

SIMPLE ENVIRONMENT
who have varying utility from participating, uk = k,
with k distributed uniformly on [0, 1]
monopoly
I pm = 1/2
I creates deadweight loss

ENTER A DAO
consider a dao

ENTER A DAO
consider a dao
I there is no central authority making the pricing decision

ENTER A DAO
consider a dao
I all potential users have a governance token

ENTER A DAO
consider a dao
I used to vote on the price p

ENTER A DAO
consider a dao
I collected profit redistributed to token holders as a dividend

ENTER A DAO
consider a dao
I collected profit redistributed to token holders as a dividend
they could set p = 0
I everyone joins with utility uk = k
I social welfare is maximized
I no deadweight loss

DECISIONMAKING IN THE DAO

some low k, however, prefer collecting dividend from higher price
rather than participating at a low price

I non-users prefer pm = 1/2

I users prefer p = 0

k > 1/4 prefer to participate at p = 0 rather than collect the dividend

with majority voting, the dao sets p = 0

with majority voting, the dao sets p = 0
but only when every participant has exactly one token

DAO & TRADABLE TOKENS

every potential user decides whether to buy the governance token(s)
they can buy more than one token

payoff of a user with t tokens is
k
|{z}
usage utility
− p
|{z}
price (I pay)
+ t p(1 − p)
| {z }
dividend (others pay)

k
|{z}
usage utility
− p
|{z}
price (I pay)
+ t p(1 − p)
| {z }
with p > 0 everyone wants to buy more tokens to get the dividend

k
|{z}
usage utility
− p
|{z}
price (I pay)
+ t p(1 − p)
| {z }
if a user finds it profitable to buy one token, he will want to buy all

k
|{z}
usage utility
− p
|{z}
price (I pay)
+ t p(1 − p)
| {z }
I for t < n/2, each token is worth p(1 − p)

k
|{z}
usage utility
− p
|{z}
price (I pay)
+ t p(1 − p)
| {z }
I for larger t, the agent can choose price that benefits them most

k
|{z}
usage utility
− p
|{z}
price (I pay)
+ t p(1 − p)
| {z }
I the more tokens, the higher the price, p∗
(t) = t−1
2t , and higher benefit

k
|{z}
usage utility
− p
|{z}
price (I pay)
+ t p(1 − p)
| {z }
I the more tokens, the higher the price, p∗
(t) = t−1
2t , and higher benefit
=⇒ each of the tokens is worth more than the previous

DAO & TRADABLE TOKENS – EQUILIBRIUM
who is the highest bidder?

non-users bid 1
4n for the tokens, while users bid k + (n−1)2
4n > 1
4

non-users bid 1
4n > 1
4
if allowed, k = 1 buys all the tokens

non-users bid 1
4n > 1
4
and sets the price to p = n−1
2n

non-users bid 1
4n > 1
4
and sets the price to p = n−1
2n . 1
2 = pm , almost monopoly price

LIMITS TO DECENTRALIZATION IN DAOS
when agents are differentiated, few will have higher WTP for the
tokens than the rest
value of tokens increase with holdings
=⇒ concentration

=⇒ concentration
with many tokens, the tradeoffs change
=⇒ k’s initially most in favor of p = 0, end up setting close to pm

=⇒ concentration
how to prevent it?

=⇒ concentration
how to prevent it?
I limit acquiring

=⇒ concentration
how to prevent it?
I limit acquiring (conflicts with permissionless)

=⇒ concentration
how to prevent it?
I semi-decentralization

=⇒ concentration
how to prevent it?
I semi-decentralization → new questions

PLATFORMS AND BLOCKCHAINS – BENEFITS AND CAVEATS
blockchain technologies offer new solutions to old problems

I but they may come at a price, or not work as expected

utility tokens may improve viability of a new platform

I at a cost of overall profits

=⇒ still room for banks and VCs

governance tokens may allow for decentralization and increase welfare

I do not remove tendencies to re-centralize and extract surplus

=⇒ without additional safeguards may lead to powerful intermediaries

=⇒ without additional safeguards may lead to powerful intermediaries
THANK YOU!

3_halaburda_tokens-platforms_A.pdf

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3_halaburda_tokens-platforms_A.pdf