Decentralized Platforms: Governance, Tokenomics, and ICO Design

Traditional two-sided platforms (e.g., Amazon, Uber) rely primarily on commission contracts to generate revenues and fuel growth, whereas their decentralized counterparts (e.g., Uniswap, Filecoin) often forego these in favor of token retention. What economics underpin this choice? We show that with properly designed initial coin offerings (ICOs), both mechanisms can independently alleviate market failures at the initial fundraising stage and incentivize long-term platform building. However, they achieve this in different ways. Although commission contracts often lead to higher profits for founders, token retention leads to higher service levels, benefiting the users and service providers. In essence, token retention surrenders a fraction of earnings to better align with the tenets of decentralized governance. Combining both mechanisms can add value, but only in relatively limited cases. These findings offer guidance and a possible rationale for why platforms may want to favor one mechanism over the other or use both.

Automated summary

Traditional two-sided platforms and decentralized platforms have different approaches to generating revenue and promoting growth. Properly designed initial coin offerings (ICOs) can address market failures and incentivize long-term platform building through different mechanisms. Commission contracts benefit founders with higher profits, while token retention improves service levels for the benefit of users and service providers.