Initial Coin Offerings (ICOs) are an emerging form of fundraising for Blockchain-based startups. We propose a simple model of matching supply with demand with ICOs by companies involved in production of physical products. We examine how ICOs should be designed---including optimal token floating and pricing for both the utility tokens and the equity tokens (aka, security token offerings, STOs)---in the presence of product risk and demand uncertainty, make predictions on ICO failure, and discuss the implications on firm operational decisions and profits. We show that in the current unregulated environment, ICOs lead to risk-shifting incentives (moral hazard), and hence to underproduction, agency costs, and loss of firm value. These inefficiencies, however, fade as product margin increases and market conditions improve, and are less severe under equity (rather than utility) token issuance. Importantly, the advantage of equity tokens stems from their inherent ability to better align incentives, and hence continues to hold even in unregulated environments.

Gerry Tsoukalas is an assistant professor at the Wharton School at the University of Pennsylvania, teaching the core MBA class in Business Analytics, as well as graduate and undergraduate-level electives in mathematical modeling for finance.

His research interests lie at the intersection of operations, technology and finance, with a focus on fintech operations. Specific areas of application include how to optimally design and operate crowdfunding and blockchain-based platforms, supply chain finance and portfolio management. His work has appeared in leading academic journals, including Management Science, Operations Research, and M&SOM. He serves on the editorial board of Management Science, as an Associate Editor.

Professor Tsoukalas completed his undergraduate studies in France, receiving degrees in Physics from the University of Paris, and Aeronautical Engineering from the Institut Supérieur de l’Aéronautique et de l’Espace-Supaero (2005). He completed his graduated studies in the US, receiving a Masters in Aeronautics & Astronautics from MIT (2007) and a PhD in Economics & Finance from the Management Science & Engineering Department at Stanford University (2009-2013). He was also previously a doctoral scholar at the MIT Operations Research Center (2011-2012).

Professor Tsoukalas has experience working with a variety of firms in the financial services and tech industries. Previously, He was a structured products trader at Morgan Stanley in London (2007-2009). He has also consulted for and advised several startups, proprietary investment firms and hedge funds, including EvA Funds (2010-2011), and Weiss Asset Management (2012-2013), and has held stints in several international banks, including Barclays Capital (2006) and Societe Generale (2005).