A Model Of Cryptocurrencies by Michael Sockin, Wei Xiong

1 The Model
In this section, we present a baseline model to highlight the key conceptual di§erences
between a token-based platform and an eqity-based platform. There are three dates t 2
f0; 1; 2g : For simplicity, we consider a generic platform, which facilitates bilateral transactions

among a group of users. At t = 0; the developer of the platform chooses a scheme
to fund the platform based on a prior belief about the platformís fundamental, which we
will describe in more detail later. At t = 1; each potential user chooses whether to join the
platform. After joining the platform, a user has the opportunity to randomly match with
another user to make mutually beneÖcial transactions at t = 1 and t = 2, which can be
viewed as the short run and the long run, respectively. In the next section, we will further
expand the model to have overlapping generations of users to discuss how resale of tokens
may a§ect the participation decision of each generation of users.
The developer of the platform can choose from two funding schemes for the platform, a

conventional equity-based scheme and a token-based scheme. A key feature of our analysis
is that the platform owner lacks commitment across the two periods and cannot commit to
not abusing the users at t = 2 after they have initially joined the platform at t = 1. This
lack of commitment is a reasonable premise for several reasons. First, it is common for these
digital platforms to update their terms of service, which give them the áexibility to adopt
strategies that beneÖt themselves at the expense of the users. Second, digital platforms
collect large volumes of user data, which gives the platforms the capacity to take advantage
of their users by either selling the data to third parties or by pursuing aggressive advertising
strategies. SpeciÖcally, we assume that the owner of the platform, which is only present
under the equity-based scheme, can take a subverting action at t = 2 that monetizes usersí
private data. Anticipating the ownerís lack of commitment may in turn a§ect the decisions
of potential users to join the platform.
At t = 1; there is a continuum of potential users with a measure of one unit, indexed by
i 2 [0; 1]. These potential users need to transact goods with each other and can participate
in two rounds of trading at t = 1; 2 on the platform. To join the platform, each user incurs
a personal cost of  > 0, which is related to setting up the necessary software and getting
familiar with the institutional arrangements of the platform, and may need to pay an entry
fee c to the platform. This entry fee may take di§erent forms, depending on the platformís
funding scheme, and can be positive or negative. As we will discuss, if the platform is funded
by a token-based scheme, a user needs to pay the cost of acquiring a token to join the platform
and consequently pay a positive fee. If instead the platform is funded by an equity-based
scheme, the owner (i.e., equity holders of the platform) may choose to subsidize each userís
initial participation by providing a subsidy, such as giving free digital services. In this case,
a user incurs a negative entry fee. Those who do not join initially cannot participate on the
platform in either round of transaction. Let Xi = 1 if user i joins the platform, and Xi = 0
if he chooses not to.
User i is endowed with a certain good, which is distinct from the goods of other users,
and has a randomly matched trading partner, user j, in the general pool. Only if both i and
j are on the platform, can they trade their goods with each other at t = 1 and t = 2. After
each round of transaction, user i has a Cobb-Douglas utility function over consumption of
his own good and the good of user j according to

A Model Of Cryptocurrencies by Michael Sockin, Wei Xiong