The Right Way to Think About Crypto Tokens.
Consumers might be the biggest winners when crypto tokens are designed correctly. At least that’s the case made by a new paper by MIT’s Christian Catalini and the University of Toronto’s Joshua Gans, which describes a simplified model that illustrates what might be a valuable price discovery role that utility tokens, or those that operate as true commodities in the spirit of bitcoin and ether, might enable.
Not only that but the paper, called “Initial Coin Offerings and the Value of Crypto Tokens,” goes so far as to predict a world where tokens empower consumers to choose an optimal price for a service collectively.
The introduction will be mentioned: “This paper provides the first economic analysis of the ICO funding mechanism and how it relates to traditional equity financing.”
It goes on to tease out intriguing benefits that might accrue to society through the sale of and trade in utility tokens, one of the most controversial topics in crypto today, suggesting that risks could be balanced by returns if entrepreneurs are permitted to try the token fundraising model so the public can see how it plays out.
Most people looking at the initial coin offering (ICO) trend see extraordinary sums of money coming in $8.84 billion as of February, according to the CoinDesk ICO tracker, and no doubt that’s why U.S. regulators, such as the Securities and Exchange Commission (SEC) have raised so many questions about this new industry.
“The problem the regulators have is they don’t know what the goals are,” Gans told CoinDesk in a phone call. “Instead the regulators are coming in saying ‘I don’t really know how the market should be working, but it smells terrible.'”
Which tokens should they create? In this way, the paper was meant to begin a conversation about the right way to think about tokens so that societies could rationally consider the correct approach to managing them. “You have to create the economic theory to understand what’s going on here to even know what category of regulation to choose,” Gans said.
“The ICO mechanism allows entrepreneurs to generate buyer competition for the token, which, in turn, reveals consumer value without the entrepreneurs having to know, all based on forecasts and the consumer willingness to pay,” the paper argues.
In this sense, Gans said: “We were trying, with our paper, to ask why would these tokens be of any value.”
The paper plays out a simple model of a company offering a token as the sole means of paying for some new technology platform (like a video site or malware detector), with a founder who has no intention of cheating or bending on commitments. The idea is that the issuer can have some idea of how much it would cost to build whatever it wants to build, but the firm can’t reliably know how the public will price it.
The hard thing about technology projects is that they often have very high upfront costs to write the code, test it and get it working, these are the fixed costs. On the other hand, once it’s built, each new user usually doesn’t cost the company much, it represents the marginal cost.
Gans believes that entrepreneurs are thinking about costs a lot more than demand when they run token sales.
To the respect reported Gans, “The real value of the tokens has really nothing to do with the amount of money you want to spend, but with how much money people want to spend with you.”
That said, Gans argued that it didn’t matter if a token project gets specific early on about pricing new services in terms of its token. For example, if Netflix launched today with an ICO, it might say in its white paper that one NFLX token would be good for one month of streaming video.
That level of specificity isn’t necessary before a project gets started, Gans said, but it might help if the company spelled out some of its thinking about how many users it might get over time and what factors might influence it growing or declining.
Such projections would give the market more insight to price the products accurately before they launch, including future gains.
Gans added, “Maybe people who are doing these white papers could provide a more clear path to whatever they are doing.”
On the other hand, he added: “I don’t think for a moment that anyone who’s buying these tokens has worked all that out.”
What the founders should not do. One caveat: it only works if founders don’t cheat, and there are two key cheats that consumers and speculators both need to worry about.
Recognizing the fact that no one has had the opportunity to see an ICO run from a symbolic sale to the launch and adjustment of the product market, theoretically, this basic model works well, assuming that it is a founder in good faith. Of course, the greatest danger is a founder who presents a convincing vision, executes a symbolic scale and escapes or goes away with the profits.
And here Gans welcomes the present scrutiny by regulators. He said, “Their instinct to stop people making false promises is of course correct.”
But what if the issuer breaks the commitment to only accept the token as payment on the platform? If they did that, the price of tokens has the potential to completely collapse.
On the other hand, the issuer could also just issue more tokens. Then all the tokens in the world would drop proportionally in value.
Most issuers hold tokens, supposedly to align their interests with their users, but this is really no protection because the issuer will still come out ahead issuing new tokens, even if their reserve loses value. As Gans said, this is why some countries get into out of control inflation situations, because every time a treasury prints more money, the state comes out ahead until it all completely unravels.
That said, this danger is only contingent on projects that announce a fixed supply of tokens that will never change again after the token generation event, as most ICO projects do today.
“What if during that growth cycle you realize you don’t have enough money and you need more?” Gans asked. “You’re going to be a bit stuck.”
He added: “I wonder if they are tying their hands way too much?”
While Gans and Catalini identify these sorts of dangers, their paper doesn’t suggest solutions. The idea here is to begin laying out this basic model to facilitate further research and discussion.
“This is a very simplified model,” Gans said of their paper. “I don’t know how everything’s going to work out.”
In summary the initial coin offerings (ICO), on the blockchain-bitcoin technology, have a great acceptance by the public and fanatics of the cryptocurrencies, the problem appears that these can present problems for the ecosystem in general, when a Startup , does not clarify well what is the purpose of the sale of tokens, may arise; mistrust and credibility, therefore agencies such as the SEC, act to protect investors. It waits for new announcements.
Disclaimer: InfoCoin is not affiliated with any of the companies mentioned in this article and is not responsible for their products and / or services. This press release is for informational purposes information does not constitute investment advice or an offer to invest.