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Financial incentives for open source development: the case of Blockchain

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  • Canidio, Andrea

Abstract

Unlike traditional open-source projects, developers of open-source blockchain-based projects can reap large financial rewards thanks to a modern form of seignorage. I study to what extent this novel form of financing generates incentives to innovate. I consider a developer working on an open-source blockchain-based protocol that can be used only in conjunction with a protocol-specific crypto-token. This token is first sold to investors via an auction (the ICO phase) and then traded on a frictionless financial market. I establish that seignorage is effective at providing capital and at generating incentives to develop the protocol. Its effectiveness is however limited by the fact that, in all equilibria of the game, in each post-ICO period there is a positive probability that the developer sells all his tokens and, as a consequence, no development occurs.

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  • Canidio, Andrea, 2018. "Financial incentives for open source development: the case of Blockchain," MPRA Paper 85352, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:85352
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Julien Prat & Vincent Danos & Stefania Marcassa, 2019. "Fundamental Pricing of Utility Tokens," Working Papers hal-03096284, HAL.
    2. Andrea Canidio, 2023. "Auctions with Tokens: Monetary Policy as a Mechanism Design Choice," Papers 2301.13794, arXiv.org, revised Aug 2023.
    3. Anton Miglo, 2022. "Choice between IEO and ICO: Speed vs. Liquidity vs. Risk," FinTech, MDPI, vol. 1(3), pages 1-18, September.
    4. Richard Holden & Anup Malani, 2022. "An Examination of Velocity and Initial Coin Offerings," Management Science, INFORMS, vol. 68(12), pages 9026-9041, December.
    5. Cong, Lin William & Li, Ye & Wang, Neng, 2022. "Token-based platform finance," Journal of Financial Economics, Elsevier, vol. 144(3), pages 972-991.
    6. Anton Miglo, 2021. "STO vs. ICO: A Theory of Token Issues under Moral Hazard and Demand Uncertainty," JRFM, MDPI, vol. 14(6), pages 1-35, May.
    7. Tao, Zhijie & Peng, Bo & Ma, Lina, 2023. "Optimal initial coin offering under speculative token trading," European Journal of Operational Research, Elsevier, vol. 306(2), pages 632-644.
    8. Lo, Yuen C. & Medda, Francesca, 2020. "Assets on the blockchain: An empirical study of Tokenomics," Information Economics and Policy, Elsevier, vol. 53(C).
    9. Richard Holden & Anup Malani, 2019. "The ICO Paradox: Transactions Costs, Token Velocity, and Token Value," NBER Working Papers 26265, National Bureau of Economic Research, Inc.
    10. Lin William Cong & Yizhou Xiao, 2021. "Categories and Functions of Crypto-Tokens," Springer Books, in: Maurizio Pompella & Roman Matousek (ed.), The Palgrave Handbook of FinTech and Blockchain, edition 1, chapter 0, pages 267-284, Springer.
    11. Dmitri Boreiko & Dimche Risteski, 2021. "Serial and large investors in initial coin offerings," Small Business Economics, Springer, vol. 57(2), pages 1053-1071, August.
    12. Andrea Canidio & Vincent Danos & Stefania Marcassa & Julien Prat, 2021. "Tokens and ICOs: A Review of the Economic Literature," Post-Print hal-03678409, HAL.
    13. Jiri Chod & Nikolaos Trichakis & S. Alex Yang, 2022. "Platform Tokenization: Financing, Governance, and Moral Hazard," Management Science, INFORMS, vol. 68(9), pages 6411-6433, September.
    14. Anil Savio Kavuri & Alistair Milne, 2019. "FinTech and the future of financial services: What are the research gaps?," CAMA Working Papers 2019-18, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    15. Miglo, Anton, 2022. "FinTech Development in Greater Manchester: An Overview," MPRA Paper 111348, University Library of Munich, Germany.

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    More about this item

    Keywords

    Blockchain; decentralized ledger technologies; Initial Coin Offering (ICO); seignorage; innovation; incentives; open source;
    All these keywords.

    JEL classification:

    • L17 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Open Source Products and Markets
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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