Decentralization Through Tokenization
We examine decentralization of digital platforms through tokenization as an innovation to resolve the conflict between platforms and users. By delegating control to users, tokenization through utility tokens acts as a commitment device that prevents a platform from exploiting users. This commitment comes at the cost of not having an owner with an equity stake who, in conventional platforms, would subsidize participation to maximize the platform's network effect. This trade-off makes utility tokens a more appealing funding scheme than equity for platforms with weak fundamentals. The conflict reappears when non-users, such as token investors and validators, participate on the platform.
We thank Franklin Allen, Will Cong, Cam Harvey, Emiliano Pagnotta, Aleh Tsyvinski, Haoxiang Zhu, and participants of various seminars and conferences for helpful comments. We are particularly grateful to Bruno Biais, an Associate Editor, and three referees, whose highly constructive suggestions helped shape this paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.