Token sales design under network effect

This paper explores the use of initial coin offerings (ICOs) as a means of fundraising for companies through the issuance of blockchain‐based tokens. Specifically, we investigate how a company can implement ICOs and issue tokens supported by its products while taking into account the presence of network effects. We examine several aspects of ICOs, including the impacts of network effect on the company's optimal token sales design, such as the optimal token issuance price, the ICO cap (which refers to the number of tokens to be issued), and the amount of funds raised. We also consider the cases of deterministic and uncertain network effects, the impacts of limited speculators purchasing tokens during the ICO period, the comparison between ICOs and traditional bank financing, and the impact of ICO cost. The research unfolds in five key parts. Firstly, leveraging a baseline model, we derive equilibrium outcomes and the optimal token sales design, discerning the impact of deterministic and uncertain network effects. Notably, network effect uncertainty consistently benefits companies, ensuring profit resilience despite potential challenges, although in the face of such uncertainty, the ICO company may decrease the raised fund. Secondly, we investigate the consequences of a limited number of speculators in the ICO landscape, finding that adjustments on the token sales design are not required under low expected network effect. Thirdly, a comparative study between ICOs and bank financing reveals distinctive advantages of ICOs. ICOs prove capable of decreasing profit volatility while maintaining an equivalent profit compared to traditional bank financing. This insight offers valuable guidance for companies seeking optimal financing methods aligned with their risk preferences. Lastly, the impact of ICO cost on outcomes and token sales design is scrutinized. Contrary to expectations, ICO cost does not uniformly lead to an increase in the ICO cap, underscoring the nuanced relationship between costs and fundraising strategies.