Paper: arXiv 2402.04662

Authors: Guangye Cao

Abstract

Why would a blockchain-based startup and its venture capital investors choose to finance by issuing tokens instead of equity? What would be their rates of return for each asset? This paper focuses on the liquidity difference between the two fundraising methods. I build a three-period model of an entrepreneur, two types of investors, and users. Some investors have unforeseen liquidity needs in the middle period that can only be met with tokens. The entrepreneur obtains higher payoff by issuing tokens instead of equity, and the payoff difference increases with investors risk-aversion and need for liquidity in the middle period, as well as the depth of the token market.

Complexity vs Empirical Score

  • Math Complexity: 6.0/10
  • Empirical Rigor: 2.5/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper provides a formal theoretical theoretical framework utilizing a three-period model to analyze the trade-offs between tokenization and equity financing for startups. While structurally sound and novel in addressing token market depth and investor liquidity needs, it lacks empirical validation or backtested market data to support its theoretical conclusions.

Research Flowchart

  flowchart TD
    A["Research Question: Token vs. Equity Financing<br/><i>(Why choose tokens & impact on returns?)</i>"] --> B["3-Period Theoretical Model<br/><i>(Entrepreneur, VC Investors, Users)</i>"]
    
    C["Inputs & Parameters<br/>• Investor Liquidity Needs<br/>• Risk-Aversion Levels<br/>• Token Market Depth"] --> B
    
    B --> D["Comparative Analysis<br/><i>(Evaluating Token Liquidity vs. Equity Illiquidity)</i>"]
    
    D --> E1["Higher Entrepreneur Payoff via Tokens"]
    D --> E2["Payoff Premium Increases with<br/>Risk-Aversion, Liquidity Need & Market Depth"]

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0 of 54 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.