This paper develops a model to examine decentralization of online platforms through tokenization as an innovation to resolve the conflict between platforms and users. By delegating control to a collection of preprogrammed smart contracts, tokenization creates commitment devices that prevent a platform from abusing its users. This commitment comes at the cost of not having an owner with an equity stake who, in conventional platforms, would subsidize user participation to maximize the platform’s network effect. This trade-off makes utility tokens a more appealing funding scheme than equity for platforms with weak fundamentals. Our analysis further highlights that token prices are determined by the marginal user’s convenience yield, in contrast to equity, whose payoff is determined by the average user.
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