Initial Coin Offerings and the Value of Crypto Tokens

Abstract

This paper explores how entrepreneurs can use fungible tokens—whereby they issue digital assets and commit to only accept those tokens as payment for future products or services—to fund venture development. We show that tokens can acquire value through a mechanism where entrepreneurs generate buyer competition by setting divide-the-money prices, despite lacking traditional equity-like cash flow rights. However, we uncover a fundamental tension: when ventures face ongoing operational costs, they must retain tokens to credibly commit to fair pricing, yet this conflicts with their need to sell tokens to raise development capital. We prove this leads to an impossibility result for simple token structures and demonstrate how observed practices such as vesting schedules, multi-stage offerings, and pre-committed buybacks resolve this tension. Our analysis reveals that while venture returns are independent of token supply growth, initial fundraising is maximized by setting that growth to zero. Beyond traditional ICOs, our model applies to various token-based financing mechanisms including layer-1 protocols, DeFi platforms, and Web3 applications, providing insight into how these mechanisms facilitate coordination among stakeholders in digital ecosystems.