A Robust Financing Theory of ICOs under Demand Uncertainty of Products of Token Platforms

Abstract

The potential market demand for a blockchain-based platform's products significantly influences the likelihood of its Initial Coin Offering (ICO) success. However, accurately predicting market demand is challenging due to the often intangible nature of the platform's offerings and the difficulty of observing their usage. This paper develops a robust ICO financing model to address demand uncertainty while accommodating the entrepreneur's aversion to ambiguity. We study how this ambiguity aversion impacts token financing ratio, output, effort, and equilibrium token price. Our theoretic results indicate that entrepreneurs with high ambiguity aversion tend to transfer more demand uncertainties to investors by increasing the token financing ratio and exhaust fewer efforts to product, which in turn reduces the total value of the venture and the equilibrium token price. This model discovers that ambiguity premiums exist in the token market and tokens are likely to dominate venture capital equity for entrepreneurs with low ambiguity aversion.