The rapid growth of blockchain and cryptocurrencies has been remarkable—and little studied owing to their novelty factor. ITOM Professor Rowena Gan of SMU Cox notes that since the very first conferences in 2017 where blockchain discussions were sparse and attendance limited, “the [recent] surge in interest and researcher involvement has been unprecedented.” Newly published research by Gan and coauthors analyzes blockchain-based platform economics, primarily studying the revenue models of two-sided platforms like Amazon and Filecoin.

The authors’ study illuminates the innerworkings and decision paths to successful blockchain-based platforms. Bitcoin and the tokens, or coins, issued in Gan’s research share the similarity of being a cryptocurrency. The difference though is that the value of the tokens in Gan’s research is derived from the value of the platform or its service offering.

Asked about tokens, Gan notes, “it’s crucial to differentiate platform-specific tokens from cryptocurrencies like Bitcoin.” Platform-specific tokens are issued by entrepreneurs to finance their platforms and are used exclusively within their ecosystem. Bitcoin, on the other hand, isn’t tied to any specific platform and functions more as a medium of exchange. The value of platform-specific tokens is derived from the platform’s value or services offered, while Bitcoin’s value (currently and) primarily hinges on its potential as a medium of exchange.

Platform economics and tokens

To study token economics, the authors’ developed a model centered on capped initial coin offerings (ICOs). In this case, the number of tokens (coins) available to investors (or speculators) is limited by the number set by the issuer. In prior work, they noted that roughly 90% of past ICOs have been capped. However, some highly successful ICOs, raising substantial funds such as EOS at $4.2 billion, were uncapped, ie., no limits were placed on tokens sold during the ICO. All of the tokens desired by investor or speculators become part of the token supply.

“Intrigued by this success, we shifted our investigation, which previously examined physical production, or products, tied to ICO tokens,” notes Gan. This time, the authors explored platforms, specifically, a peer-to-peer two-sided platform. This distinction marks their exploration of a different type of ICO, uncapped ICOs, applied within a distinct setting.

Essentially, this paper delves into platform economics, primarily studying the revenue models of platforms like Amazon and Filecoin, both two-sided platforms. Filecoin, a decentralized storage network, enables users to rent out unused hard drive space in exchange for Filecoin tokens. This concept resembles Airbnb, except the product is data storage versus lodging, which functions on a blockchain basis (unlike Amazon which operates using traditional fiat currencies). The revenue models of these platforms primarily revolve around token retention and platform commission.

Common in blockchain-based platforms, token retention involves pre-selling future production via tokens during an ICO and retaining a portion for the issuer’s benefit upon the platform’s launch. (Token retention can be linked to insider ownership in equity offerings.) In contrast, platform commission, prevalent in traditional two-sided markets like Amazon and Uber, involves extracting a percentage of transaction revenue after its launch.

The study analyzes when and why a platform should opt for one revenue model over the other and the advantages and drawbacks of each. “We specifically focus on how platform commission affects service providers’ profits in contrast to token retention,” Gan says. Through token retention however, “service providers often earn positive profits, potentially leading to more decentralized governance and enhanced service levels,” she adds.

Regarding decentralization, the authors’ focus lies in comparing platform commission and token retention. Decentralized approaches provide users, both buyers and sellers, more direct control and a larger piece of the pie, the researchers say. “We found that platform commission tends to diminish service providers’ profits, necessitating price adjustments upwards, potentially reducing the number of customers able to afford the service,” Gan notes. In contrast, token retention avoids extracting service providers’ profits, often leading to positive provider profits and a potentially higher service level, or increased decentralization.

About cryptocurrencies

New cryptocurrencies seem to regularly emerge from the ethers. Asked about convergence into a single cryptocurrency, while platform-specific tokens may proliferate due to their versatility within liquid secondary markets, the possibility of one universal cryptocurrency is plausible, Gan offers. Cryptocurrencies designed purely for exchange purposes, such as Bitcoin, Litecoin, and stable coins, exhibit high substitutability, which could potentially leading to a universal preference in the future.

Regarding successful ICOs, their success often hinges on strategic decisions made in rapidly changing regulatory landscapes and shifting public interests. Notably, blockchain conferences draw bigger crowds and have become more popular.

The question of a token’s value is often perplexing to many outside the perimeters of the crypto and blockchain worlds. “I often clarify that a token’s value should align with the value of the service or product it represents,” Gan suggests. “Evaluating a token’s worth involves complex analyses, akin to assessing the value of a stock.” However, ICOs present a challenge as they often launch with only a prototype, unlike initial public offerings (IPOs) that typically involve more established companies.

With low barriers to entry, evaluating tokens’ values and ICOs requires meticulous scrutiny and understanding their intrinsic worth requires a deeper analysis beyond the surface. The study of the financing of platforms via cryptocurrencies and monetization strategies is nascent and evolving.

“Decentralized Platforms: Governance, Tokenomics, and ICO Design,” by Jingxing (Rowena) Gan of Southern Methodist University’s Cox School of Business, Gerry Tsoukalas of Boston University, and Serguei Netessine of University of Pennsylvania was recently published in Management Science.

Written by Jennifer Warren.