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Decentralization Through Tokenization

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  • Michael Sockin
  • Wei Xiong

Abstract

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.

Suggested Citation

  • Michael Sockin & Wei Xiong, 2022. "Decentralization Through Tokenization," NBER Working Papers 29720, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29720
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    Cited by:

    1. Yuxuan Lu & Qian Qi & Xi Chen, 2023. "A Framework of Transaction Packaging in High-throughput Blockchains," Papers 2301.10944, arXiv.org.
    2. Yannis Bakos & Hanna Halaburda, 2022. "Overcoming the Coordination Problem in New Marketplaces via Cryptographic Tokens," Information Systems Research, INFORMS, vol. 33(4), pages 1368-1385, December.
    3. Long Chen & Yadong Huang & Shumiao Ouyang & Wei Xiong, 2021. "The Data Privacy Paradox and Digital Demand," Working Papers 2021-47, Princeton University. Economics Department..

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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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