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IS DECENTRALIZED FINANCE (DEFI) EFFICIENT?

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 I S D ECENTRALIZED F INANCE (D E F I ) E FFICIENT ?*
Paul P. Momtaz
The Anderson School at UCLA

April 27, 2022

Abstract

How efficient is Decentralized Finance (DeFi)? To answer this question, we study the efficiency
and the role of intermediation in a large DeFi segment, namely, the market for Initial Coin Offer-
ings (ICOs). In particular, we advance a search-related theory of DeFi, in which search frictions
partly offset the efficiency gains from reduced transaction costs thanks to blockchain technology
and smart contracts. The intensity of search, i.e. the process of identifying valuable projects, is
increasing in market granularity. Blockchain technology increases market granularity through
lower entry barriers. Lower-end entrants, however, increase aggregate search intensity but lack
search skills. The resulting search-related inefficiency creates a niche for DeFi intermediaries.
Consistent with this theory, our findings suggest that DeFi intermediaries reduce search frictions
and extract economic rents for their services. Relative to the Walrasian equilibrium, DeFi is rela-
tively inefficient, and search frictions reduce the welfare for society almost by half. The evidence
indicates that perfectly decentralized finance markets would not be optimal for society.

Keywords: Decentralized Finance (DeFi), Initial Coin Offering (ICO), blockchain-based crowdfund-
ing, tokens, entrepreneurial finance, crypto funds, intermediation, search
JEL Codes: G23, G24, L26

* Thanks goes to Mike Ewens, Josh Lerner, Song Ma, and other WEFI seminar participants. I am also grateful to

Alessandro Gavazza for sharing his code. All errors are my responsibility. Address correspondence to UCLA Anderson
School of Management, Los Angeles, CA 90095, mailto:momtaz@ucla.edu. Previous versions circulated under different
titles (see Momtaz, 2022a, 2022b
1 Introduction
New technologies are continuously changing the nature of entrepreneurial finance. The trend goes
toward a decreasing degree of intermediation. The rationale is, inter alia, that disintermediation
increases the economic transaction surplus that entrepreneurs and investors get to enjoy. For exam-
ple, equity-based crowdfunding and its related forms (for reviews, see Block et al., 2021; Lambert,
2022; Mochkabadi and Volkmann, 2020; Moritz and Block, 2016) have partially eliminated Ven-
ture Capitalists (VCs) from more traditional venture financing, which has substantially increased
the potential return on investment that investors receive,1 and it has also expanded the supply-side
market for venture financing to previously underserved individual investors. The crowdfunding
revolution continues to have a dramatic impact on how ventures raise financing, and it also chal-
lenges classic scholarly paradigms in the entrepreneurial finance literature, which resulted in some
of the most impactful research in economics and management of the last decade (e.g., Ahlers et al.,
2015; Belleflamme et al., 2014; Mollick, 2014).
Decentralized Finance (DeFi) markets for startups are the next stage in the evolution of en-
trepreneurial finance (Bellavitis et al., 2021; Block et al., 2021; Chen and Bellavitis, 2020; Kher
et al., 2021; Meyer et al., 2021). DeFi markets for startups refer to blockchain-based crowdfund-
ing (more commonly known as Initial Coin Offerings or ICOs, see Fisch, 2019, for seminal work),
which further economize on intermediation costs by replacing crowdfunding platforms, such as
Kickstarter, with smart contracts (Adhami et al., 2018; Bellavitis et al., 2020; Bellavitis et al., 2021;
Benedetti and Kostovetsky, 2021; Boreiko and Risteski, 2021; Campino et al., 2022; Chalmers et al.,
2022; Fisch, 2019; Fisch et al., 2021; Howell et al., 2020; Momtaz, 2020a, 2021d). Smart contracts
are computer protocols that automate the exchange of investors’ financial contributions to ICOs and
tokens that often represent claims on ventures’ future assets at a predefined exchange rate. The
only fee incurring in the execution of a smart contract is the fee to operate the blockchain network.
For example, the average transaction cost on the most popular blockchain, Ethereum, was less than
$2 during January 2022, which reduces transaction costs for crowdfunding to a minimum.2
This paper argues both theoretically and empirically that, despite their transactional efficiency,
DeFi markets are relatively inefficient with respect to “search.” Search broadly refers to the process
of finding a matching transaction counterparty. The intuition is straightforward: DeFi markets for
startups are very granular; that is, they have high levels of market participation (anyone with in-
ternet connectivity may participate) and market completeness (everything can be tokenized). Smart
contracts enable that anyone can trade anything with anybody at almost no cost (transactional
efficiency). The flip side is, however, that market granularity is proportionate to the required
search effort (see, for a recent survey among individual investors, Ante et al., 2022). More individ-
ual agents and traded products and services mean that agents wishing to transact have to screen
deeper markets, which takes more time, in order to avoid resource misallocations through subop-
timal transactions (search-related inefficiency). The problem is plausibly particularly pronounced
1
VCs typically charge performance fees of 20% and annual management fees between 1 and 2%.
2
In comparison, equity-based crowdfunding platforms typically charge fees around 7%.

1
in DeFi markets because blockchain technology and smart contracts promote market granularity
and market segmentation (Benedetti and Nikbakht, 2021), while they do not offer a technological
solution to facilitate search. For this reason, critics of DeFi markets claim that DeFi is utopian given
the pervasive search frictions, and that entrepreneurial finance may revert back to intermediated
markets (e.g., Zetzsche et al., 2020).
Consequently, this paper aims to advance the literature on search in entrepreneurial finance by
addressing the following, overarching research question:

How efficient are DeFi markets for startups, and

to what extend do search frictions reduce aggregate market efficiency?

The question is important because the current state of the literature on ICOs is ripe with ef-
ficiency losses due to market design problems (e.g., Bellavitis et al., 2021; Hornuf et al., 2021;
Momtaz, 2021d), but fails in large part to provide an explanation for why novel, specialized in-
termediaries, so-called “crypto funds,” are rapidly entering the DeFi market for startups (Fisch and
Momtaz, 2020). Crypto funds are a blend of venture-style hedge funds that pool retail investors’
funds and channel them through sophisticated trading strategies to tokenized startups in liquid sec-
ondary markets for tokens. Crypto funds plausibly have emerged as a response to search frictions
in DeFi markets, which are very pronounced due to the high levels of asymmetric information in
ICOs (Block et al., 2021; Boreiko and Vidusso, 2019; Zetzsche et al., 2020). This resonates with
an established literature that intermediaries extract rents from reducing search frictions in decen-
tralized markets (Demsetz, 1968; Rubinstein and Wolinsky, 1987). Ultimately, the paper relates
to the optimal design of entrepreneurial finance markets, and the welfare those markets create for
society.
Of course, search-related arguments are implicit in many existing works in entrepreneurial fi-
nance, and not an innovation of this study. However, to our best knowledge, search has never
been explicitly modeled in extant theory nor tested empirically in the context of entrepreneurial
finance, which is the principal contribution we claim for this study. For instance, a vast literature
examines signaling (for a review, see Colombo, 2021), e.g., in IPOs (Arthurs et al., 2009; Colombo
et al., 2019), crowdfunding (Ahlers et al., 2015; Vismara, 2016, 2018b), and ICOs (An et al., 2019;
Belitski and Boreiko, 2021; Bellavitis et al., 2020; Bellavitis et al., 2022; Fisch, 2019; Giudici and
Adhami, 2019; Lee et al., 2022), as well as adjacent arguments, such as information cascades (e.g.,
Vismara, 2018a). While all these studies implicitly assume search frictions to be an important rea-
son as to why signaling is the prime determinant of success in the competition for entrepreneurial
finance, they never make search frictions explicit; in fact, none of these studies mentions “search”
at all. Another example is the literature on institutional investments in startups, with a focus on
venture capital (Bertoni et al., 2011; Colombo and Grilli, 2010) and ICOs (Fisch and Momtaz,
2020). These studies test whether there is a selection effect in the form that institutional investors
are able to pick startups with more favorable growth prospects than non-institutional investors.
Again, at the root of the selection effect is search (i.e., institutional investors possess better skills

2
and more resources to screen the market and negotiate deals), albeit the precise nature of search
in these markets is never made explicit.
Our theory draws upon multidisciplinary search theory in decentralized markets, financial in-
termediation, as well as asymmetric information and limits to signaling literatures in entrepreneur-
ship to propose two overarching empirical predictions. The first prediction, the Decentralized
Inefficiency Hypothesis (DIH), posits that search-related frictions render DeFi markets for startups
relatively inefficient. Specifically, excessive search in DeFi markets reduces the aggregate efficiency
of the DeFi market in at least three distinct ways. First, search frictions imply that DeFi markets
for startups involve two-sided matching: Startups conduct ICO campaigns to attract investors and
investors, in turn, screen the market to identify attractive startups for investment purposes. The
time to conduct ICO campaigns often takes several months (Momtaz, 2020a), which is time in
which startup-investor matches are delayed. Thus, the first way in which search frictions impede
DeFi market efficiency is through a delay in token allocations. Second, search is costly. It is costly
for startups to market ICO campaigns to investors, and it is costly for investors (in terms of both
time and financial resources) to perform a due diligence on potentially interesting investment tar-
gets. These search-related costs imply that some investments that would be socially optimal in a
frictionless economy do not take place if search costs exceed the anticipated transaction surplus.
Therefore, the second way in which search frictions impede DeFi market efficiency is in terms of
an aggregate underinvestment in high-quality, tokenized startups. Third, because the ICO market
is characterized by high levels of asymmetric information and there are limits to signaling, there is
substantial uncertainty in the ICO market, which can cause a misallocation of financial resources
to undeserving tokenized startups. One way for this to occur is through adverse selection (Hornuf
et al., 2021) or moral hazard (Momtaz, 2021d). Thus, the efficiency of the DeFi market for startups
is also impeded by overinvestments in low-quality, tokenized startups.
The second prediction, the Intermediated Efficiency Hypothesis (IEH), posits that new DeFi in-
termediaries, in particular crypto funds, increase DeFi market efficiency by reducing search-related
frictions. Intermediaries have long been known for extracting rents by reducing search frictions in
decentralized markets (Demsetz, 1968; Rubinstein and Wolinsky, 1987). Crypto funds develop a
competitive advantage in search through economies of scale in crypto-specific human capital in-
vestments. Crypto funds screen the market and invest in the best startups, signaling startup quality
to the market and certifying project legitimacy (Fisch and Momtaz, 2020). They also reduce search
frictions related to post-ICO information production. Given the salient manifestations of moral
hazard in the ICO market (Hornuf et al., 2021; Momtaz, 2021d), investors need to monitor star-
tups post-funding and coordinate collective actions against shirking teams, which is problematic
for individual investors because they may not be able to detect manifestations of moral hazard or
coordinate collective actions directed against such behavior. Crypto funds not only have the skills
and resources to search for indicators of startup teams’ effort provisions, the threat of exit in liquid
secondary markets for tokens may prevent shirking and other forms of detrimental behavior in the
first place.

3
 Testing the DIH and IEH is challenging. The key difficulty is that both hypotheses are related to
DeFi market efficiency, which is a relative construct, and a perfectly efficient market is a counterfac-
tual benchmark that is not observed in reality. For this reason, our empirical approach is twofold.
The first empirical part involves reduced-form regression analyses of two testable relations that are
related to our overall argumentation that DeFi markets have pronounced search frictions, which
ICO intermediation via crypto funds help reduce. Specifically, we test (i) whether intermediated
ICOs are more efficient in terms of the time it takes to achieve the crowdfunding goal, and (ii)
whether entrepreneurs in non-intermediated ICOs need to sell their tokens at a discount to attract
enough investors.
The two empirical relations are not free of endogeneity concerns. For example, it is possible
that only ICOs with strong success prospects are able to secure intermediation services (selection
effect), rather than it is the intermediation that shortens the time-to-funding or increases the to-
ken value (treatment effect). To this end, we employ several two-stage and instrumental variable
approaches to disentangle the true effects of ICO intermediation. The results suggest that (i) inter-
mediated ICOs achieve the crowdfunding goal 25% faster and (ii) non-intermediated ICOs have to
offer tokens at a substantial discount of 57%. These results are in line with anecdotal evidence, in
particular that non-intermediated ICOs offer tokens at discounts in the range of 50 to 70%. There-
fore, these results jointly suggest that ICO intermediation makes the market more efficient in terms
of time-to-funding, while ICO intermediaries plausibly are able to extract substantial rents for their
services.
In the second empirical part, given the challenging nature of the DIH and IEH, we juxtapose the
reduced-form regression-based evidence with structural estimates from a simple model of the DeFi
market for startups. The model allows to estimate the ICO market’s aggregate efficiency, which is
a novelty in the entrepreneurial finance literature. In the model, there are individual investors and
intermediaries. Only individual investors enjoy a utility from holding tokens (because the token
ownership enables them, for instance, to partake in an online gaming community), while inter-
mediaries have no utility from holding tokens, but they extract rents from trading tokens. Startup
firms are heterogeneous in the model with respect to their underlying platform sizes. Intuitively,
tokens of large platforms are more valuable than tokens of smaller platforms. We calibrate the
model with actual ICO market data covering the 2017-20 period. The model predicts several ag-
gregate quantities very well. Consistent with our reduced-form estimates and findings in related
studies (e.g., Bellavitis et al., 2021; Fisch and Momtaz, 2020), the structural estimation of the
model shows that intermediaries help reduce trading delays and that search costs are pronounced
in DeFi markets for startups. Importantly, individual sellers and buyers share the transaction sur-
plus more equally in non-intermediated ICOs than in intermediated ICOs, in which intermediaries
pocket the transaction surplus almost exclusively.
Overall, the model-implied estimates suggest that the ICO market creates 52% of the welfare
it could potentially create if it were perfectly efficient, with the 48% loss stemming from search-
related inefficiency.

4
 Theoretical contributions, practical implications, limitations and avenues for future research
are discussed in Section 8. Preceding that, we provide some institutional background on DeFi,
ICOs, and crypto funds in Section 2, derive overarching empirical predictions in Section 3, discuss
data and regression results in Sections 4 and 5, the formal model in Section 6, and the structural
estimation in Section 7.

2 Institutional Background: DeFi, ICOs, and Crypto Funds

2.1 Decentralized Finance (DeFi) and the Pursuit of Disintermediation

DeFi, in its broadest sense, refers to the emergent open-source financial infrastructure that relies
on blockchain technology and smart contracts to develop innovative open protocols and decen-
tralized applications (dApps), often with the objective to eliminate traditional intermediaries from
the financial value chain and democratize the access to finance (Bollaert et al., 2021; Chen and
Bellavitis, 2020; Fisch et al., 2020; Zetzsche et al., 2020). DeFi largely builds on distributed
ledger technology (DLT), which Nakamoto (2008) created by combining blockchain technology
(Haber and Stornetta, 1990) with a proof-of-work consensus mechanism that prevents the creation
of perfect copies of digital assets, and therefore eliminates the need for trust from DeFi markets.
A relatively large and well-documented example is the DeFi market for startups, which is more
commonly known as the market for token offerings or initial coin offerings (ICOs) (e.g., Bellavi-
tis et al., 2021; Catalini and Gans, 2018; Fisch, 2019; Howell et al., 2020; Lee et al., 2022; Li
and Mann, 2018; Momtaz, 2020a). As further discussed in Section 2.2, ICOs are smart contracts
that automate transactions in which startups receive funds in exchange for their issued (utility)
tokens, which investors may redeem for future products or services. Other examples of the existing
DeFi ecosystem include decentralized exchanges (DEXs), as well as lending/borrowing, derivative
markets, insurance markets, and custodians, all of which are also decentralized.
DeFi markets may have several advantages over traditional finance markets. First, DeFi may
improve market participation. More individuals and small enterprises may gain (equitable) access
to finance because DeFi reduces the entry frictions, such as, for example, through a mitigation of
local bias in venture financing (Sorenson et al., 2016) or lending (Becker, 2007). Second, DeFi
may make markets more complete by facilitating financial innovations. This could be spurred by
the open-source character of DeFi, paired with its lack of borders and focus on interoperability
standards (Harvey et al., 2021). Third, DeFi promises a significant reduction in transaction costs
stemming from multiple sources (Allen et al., 2020). For example, disintermediation increases the
share of the transaction surplus from which transaction parties can exclusively benefit, the trans-
parency of public ledgers significantly reduces auditing costs, and the deterministic and trustless
character of smart contracts minimizes the execution risk.
At the same time, DeFi has yet to address a number of novel and idiosyncratic risks that fall
broadly into two categories: intra-protocol and inter-protocol risks. Intra-protocol risks include
consensus failures, such as 51% attacks on Proof-of-Work (PoW) blockchains and validator cartels

5
on Proof-of-Stake (PoS) blockchains, as well as intra-protocol arbitrage on automated market maker
(AMM) exchanges, known as miner extracted value (MEV) (Daian et al., 2020). Inter-protocol risks
include so-called oracle attacks, in which biased or fake outside information is fed into smart con-
tracts, and “flash loans” that pave the way for inter-contract arbitrage (Wang et al., 2021a).3 Both
intra- and inter-protocol risks have a common attribute in that they represent technical vulner-
abilities that are extremely difficult for individual platform users to detect or even understand.
Therefore, these risks distinguish DeFi from intermediated financial markets. The consequences of
these risks may be salient in crowdfunding markets, such as the ICO market, because individual
backers may not possess the technological knowledge to adequately evaluate the novel protocol
risks.

2.2 The DeFi Market for Startups: Initial Coin Offerings (ICOs)

Token offerings (or initial coin offerings, ICOs) are an entrepreneurial finance mechanism that
shares some common features with crowdfunding, venture capital, and initial public offerings (for
an excellent recent review, see Brochado and Troilo, 2021). Specifically, ICOs have evolved from
crowdfunding by employing blockchain technology to both issue and exchange stakes in startup
firms (Bellavitis et al., 2021; Fisch, 2019; Howell et al., 2020; Momtaz, 2020a). ICOs are peer-to-
peer startup financing transactions that rely on smart contracts to automate trustless transactions
between entrepreneurs and investors (Amsden and Schweizer, 2018; Fisch et al., 2020). In an
ICO, an entrepreneur raises venture financing by selling cryptographically protected digital assets,
known as tokens or coins, to investors. Tokens can represent different types of value and rights.
Cryptocurrency tokens are mere mediums of exchange, such as Bitcoin; security tokens may include
voting and control rights; and utility tokens are payment instruments (Howell et al., 2020; Lambert
et al., 2021). Utility tokens are the most frequently issued token type in ICOs (Bellavitis et al.,
2020), though developments in ICO regulation have initiated a gradual shift to security token
offerings (Lambert et al., 2021). Utility tokens are voucher-like assets that can be redeemed for
one unit of the venture’s future product or service. The reliance on blockchain technology means
that ICO investors require not only business skills but also a great deal of technological knowledge
(Bellavitis et al., 2021; Fisch, 2019). Unlike other entrepreneurial financing mechanisms, ICOs
integrate the full spectrum of “ticket sizes”, ranging from micro-cap ICOs (<$100,000) to mega-
cap ICOs (>$1,000,000, such as the EOS campaign, with more than $4 billion raised).
The first ICO (MasterCoin) took place in July 2013, and the market has steadily evolved since
then. Figure 1 shows the evolution of the market for token offerings over the 2017–2020 period.
During that time, roughly 5,500 token offerings were completed, with the majority in 2018.
Bellavitis et al. (2021) estimate that 2,598 token offerings raised an aggregate funding amount
of $12.3 billion in 2018 alone.

[Place Figure 1 about here.]

3
See Carter and Jeng (2021) for an overview of DeFi protocol risks.

6
 Utility token offerings are often thought to be perfectly disintermediated peer-to-peer transac-
tions and issued tokens are typically traded post-ICO in liquid secondary markets. Smart contracts
allow entrepreneurs and investors to automate the transaction in a trustless way, thereby redis-
tributing the transaction surplus exclusively to entrepreneurs and investors; in contrast, intermedi-
aries in crowdfunding or initial public offerings typically charge a fee of 5–7%. Disintermediation
might also democratize entrepreneurial finance markets by lowering both supply- and demand-
side entry barriers (Fisch et al., 2020), leading to more complete markets with higher participa-
tion. Moreover, because tokens can be traded at close-to-zero transaction costs and limited trading
delays through blockchain technology, ICO aftermarkets are highly liquid. Liquid post-ICO token
exchange markets reduce startup firm discounts associated with illiquidity (Barg et al., 2021) and
provide investors with rapid exit opportunities (Fisch and Momtaz, 2020; Momtaz, 2020a). Facili-
tated trades of stakes in startups might make entrepreneurial finance markets more efficient (e.g.,
by means of (fair) token valuations obtained from equilibrium prices in liquid token exchange mar-
kets that are informative for the market; see Momtaz, 2021d), thereby improving capital allocation
to the best entrepreneurial projects and potentially promoting long-term economic growth (Acs
and Szerb, 2007; Audretsch, 2018; Bellavitis et al., 2020).
Empirical works are mostly concerned with success determinants of token offerings (e.g., Ad-
hami et al., 2018; Belitski and Boreiko, 2021; Bellavitis et al., 2020; Bellavitis et al., 2021; Fisch,
2019; Giudici and Adhami, 2019; Hornuf et al., 2021; Howell et al., 2020; Momtaz, 2020a).
The roles of search, intermediation, and aggregate token market efficiency represent a void in the
literature.

2.3 New Intermediaries Entering the ICO Market: Crypto Funds

Structural problems in the ICO market, such as the systematic manifestation of moral hazard (Hor-
nuf et al., 2021; Momtaz, 2021d) and regulatory (Cumming et al., 2019) and informational fric-
tions (Bourveau et al., 2018), have led to the emergence of a novel, specialized intermediary: the
“crypto fund.” Most crypto funds resemble venture capital or hedge funds, with the important dif-
ference that they trade in “non-securities.” The number of crypto funds is rapidly growing. More
than 800 crypto funds are active and have aggregate assets under management to the amount of
$57 billion in the first quarter of 2021. The average crypto funds gross return in the first quar-
ter of 2021 was 98%, slightly below Bitcoin’s 103%. Like most hedge funds, a large portion of
crypto funds are domiciled in the British Virgin Islands or Cayman Islands for tax, legal, or other
regulatory reasons, although half of them hold primary offices in the U.S.4 Figure 2 illustrates the
penetration of the market for token offerings by crypto funds over the 2017–2020 period.

[Place Figure 2 about here.]

Crypto funds are an intriguing asset class because they differ from traditional venture capital
funds in several important ways. First, crypto funds mostly trade in non-securities, avoiding much
4
See https://cryptofundresearch.com/q1-2021-crypto-fund-report/.

7
of the regulation traditional funds face. Trading in non-securities largely exempts them from the
Investment Company Act, which enables them to cater to a new market of small and individual
investors, who are not accredited or qualified in the legal sense (Mokhtarian and Lindgren, 2018).
Indeed, crypto funds attract small investors with significantly lower minimum investment require-
ments. According to Crypto Fund Research (2021), the median minimum fund investment amounts
to $100,000. Moreover, crypto funds are largely exempted from the Advisers Act. This lifts limits
on performance fees that can be charged to small investors, making crypto funds more financially
attractive (albeit raising concerns about misalignment of incentives). Second, blockchain technol-
ogy saves crypto funds time and fees that would otherwise be incurred for third-party custodians
pursuant to the Advisers Act. Third, with some exceptions, tokens are taxable only in the case of
“recognition events,” i.e., if they are exchanged for fiat money. This allows investors to optimize
both the timing and the amount of their personal tax liabilities in coordination with their overall
portfolios (Mokhtarian and Lindgren, 2018). Finally, the liquidity of tokens lifts venture capital
funds’ burden to identify and invest in “unicorns” to compensate for the relatively large number
of failed projects, because liquid token markets allow crypto funds to exit at any time (Kastelein,
2017).

3 Theory and Hypotheses

3.1 Theoretical Framework

Our conceptual framework borrows from search and intermediation theories, as well as from asym-
metric information and signaling, to derive two overarching empirical predictions. The first predic-
tion, the Decentralized Inefficiency Hypothesis (DIH), posits that search-related frictions render
DeFi markets for startups relatively inefficient. The second prediction, the Intermediated Effi-
ciency Hypothesis (IEH), posits that new DeFi intermediaries, in particular crypto funds, increase
DeFi market efficiency by reducing search-related frictions. The intuition is simple: DeFi mar-
kets for startups are very granular; that is, they have high levels of market participation (anyone
with internet connectivity may participate) and market completeness (everything can be tokenized).
Smart contracts enable anyone to trade anything with anybody at almost no cost (transactional effi-
ciency). However, smart contracts do not provide technological solutions to facilitate searching for
matching transaction counterparties. Therefore, because the number of trading agents and traded
claims potentially reaches a maximum in DeFi markets and agents bear the burden of finding the
agent with the perfectly matching claim for trade, DeFi markets may not achieve their welfare po-
tential when many socially optimal trades do not occur if the expected transaction surplus does
not compensate for the expected search costs (search-related inefficiency). In DeFi markets for
startups, these search frictions are plausibly even more pronounced due in large part to the highly
asymmetric information and the limits to effective signaling (Hornuf et al., 2021; Momtaz, 2021d).
Therefore, a perfectly decentralized ICO market may be relatively inefficient (i.e., the DIH), and
reintroducing a certain degree of intermediation improves the market’s overall efficiency (i.e., the

8
IEH). The following section introduces the building blocks for our theory and formally derives the
predictions.

3.1.1 Search-related Frictions

Search-related frictions refer to economic costs stemming from market imperfections that impede
the efficient matching of transaction counterparties in decentralized markets (e.g., Duffie et al.,
2005). As such, search frictions are proportionate to the degree of market decentralization. In
principle, market failure may occur if search costs exceed the welfare arising from the exchange
of assets (Weill, 2020). Therefore, the probability of market failure increases in the degree of
market decentralization. As we discuss in Section 3.1.2 below, decentralized markets that face
salient search-related inefficiency often revert back to intermediated market microstructures, in
which intermediaries offer services that reduce search frictions (Gavazza, 2016; Rubinstein and
Wolinsky, 1987). The following explains why search frictions in the DeFi market for startups are
plausibly very pronounced.
DeFi markets for startups are prone to search frictions by design, largely because they improve
on both market participation and market completeness. Market participation refers to the number of
agents that can access a market. Blockchain technology has significantly lowered the entry barriers
to entrepreneurial finance markets, inter alia, through a dramatic reduction of the transaction
costs for crowdfunding campaigns (demand-side entry barrier) and a reduction in the minimum
investment amount thanks to fractional token ownership (supply-side entry barrier) (Bellavitis et
al., 2021; Fisch, 2019; Huang et al., 2020; Lambert et al., 2021; Zetzsche et al., 2020). Indeed,
Fisch et al. (2020) report that the ICO market has democratized entrepreneurial finance, evidenced,
e.g., by the increased number of investors from ethnic minorities. Market completeness refers to
the variety of assets in a market. Asset heterogeneity also creates search problems because it is
proportionate to the investors’ effort required to determine the relative fit of a focal asset in the
light of an investor’s subjective preferences (Rubinstein and Wolinsky, 1987). Smart contracts have
increased asset heterogeneity substantially because they allow the tokenization of any claim. For
example, Fisch and Momtaz (2020) report that the ICO market’s demand side is very competitive,
with often more than 1,000 competing token offerings present at the same time. Given this high
intensity, it is evident that market completion exacerbates search frictions.
The high level of asymmetric information in the ICO market further aggravates the search prob-
lem for investors (Bellavitis et al., 2020; Block et al., 2021; Fisch, 2019; Hornuf et al., 2021).
Asymmetric information is a pervasive problem in entrepreneurial finance (Colombo et al., 2019;
Vismara, 2018b). At its core, the problem with asymmetric information is that financial investors
lack the information to gauge the true quality of an investment, resulting in equilibrium prices that
are based on the population average instead of a more discriminatory pricing mechanism based
on the underlying investment value (Jensen and Meckling, 1976; Leland and Pyle, 1977). Con-
sequently, high-quality investments could sell at a discount, deterring issuers from putting those
investment opportunities on the market entirely, which may create a market for lemons (Akerlof,

9
1978). Informational asymmetries are salient in the ICO market, inter alia, because blockchain-
savvy entrepreneurs are typically young and lack a track record (An et al., 2019; Fisch, 2019);
the tokens sold are for yet undeveloped, future products (Fisch, 2019; Howell et al., 2020; Mom-
taz, 2020a); there are little mandatory disclosure laws (see Bellavitis et al., 2021; Blaseg, 2018;
Boreiko et al., 2019); and token issuers are known to embellish the information disclosed in ICO
whitepapers (Momtaz, 2021d). These problems increase aggregate uncertainty in the ICO market,
which accordingly exacerbates search-related inefficiency.
Finally, search-related inefficiency is also partly driven by the limits to signaling in the ICO
market. Several studies argue that the absence of an institutional framework for ICOs may create
a moral hazard in signaling (Hornuf et al., 2021; Momtaz, 2021d). For example, Momtaz (2021d,
p. 2) argues that “issuers plausibly have an incentive to bias signals of venture quality to their
advantage because there currently are neither functioning institutions that verify signals ex ante
nor are there those that punish signals ex post once the bias is detected. If investors are attracted to
the ventures with the most positive signals and fail to identify biased ones, then firms which are not
sending biased signals may experience a competitive disadvantage. This effectively creates a moral
hazard in signaling.” His argumentation offers an explanation for the large number of fraudulent
ICOs and scams (typical estimates are >85%, compare Malinova and Park, 2018; see, for a more
detailed analysis, Hornuf et al., 2021). Therefore, limits to signaling are relevant for granular DeFi
markets because they intensify search-related frictions. DeFi market granularity (i.e., high market
participation and completion) is proportionately related to the amount of endogenous signals that
investors need to process, which reduces the effort that can be allocated to validate each received
signal. As a consequence, a moral hazard in signaling increases search-related market inefficiency
by abetting imperfect matches (Momtaz, 2021d; Zetzsche et al., 2020).

3.1.2 Intermediation

Specialized intermediaries, so-called crypto funds, are entering the ICO market, as indicated by
Figure 2, which is likely because of the pronounced search frictions, as well as the problems re-
volving around informational asymmetries and the limits to signaling. Intermediaries have long
been known for extracting rents from reducing trading frictions in decentralized markets (Demsetz,
1968, and Allen and Santomero, 1997 for a more general treatment of financial intermediation).
Some (e.g., Zetzsche et al., 2020) even argue that DeFi markets do not reduce intermediation at
all, but simply move it to other parts in the financial value chain. There are several reasons as to
why intermediation may help reduce search frictions and improve the efficiency of the DeFi market
for startups.
First, intermediaries directly reduce search frictions. Crypto funds employ specialized teams
of blockchain technology-savvy and financial experts, who have both the skills and the resources
to screen the market, pre-select suitable investment targets, and then monitor portfolio companies
post-investment, as well as employ sophisticated active portfolio management strategies during
market shock periods (Fisch and Momtaz, 2020). This reduces retail investors’ effort as well as the

10
costs associated with finding matching investments and searching for information about investment
quality. Similarly, given that the number of crypto funds is roughly one-tenth of the number of tok-
enized startups, the ceteris paribus probability that retail investors will approach the best-matching
crypto fund is ten times higher than that of them approaching the best-matching tokenized startup.
Therefore, intermediation through crypto funds plausibly reduces search frictions in the ICO market
dramatically.
Second, intermediaries reduce informational asymmetries in ICOs because they have an in-
centive and the ability to generate information, as seen in other entrepreneurial finance markets,
such as the IPO market (Benveniste and Spindt, 1989). They also have both an incentive and the
resources to monitor and produce information (Boreiko and Vidusso, 2019; Tirole, 2001). The
role of intermediaries may be more salient in the ICO market than in other, more regulated en-
trepreneurial finance markets due in large part to its lack of effective public institutions (Zetzsche
et al., 2017). In particular, there are by and large no disclosure requirements in the ICO market,
as well as hardly any behavioral norms about the informational content required by investors and
hence disclosed by token sellers (Blaseg, 2018), which results in small amounts of disclosed infor-
mation (Kaal and Dell’Erba, 2017; Kastelein, 2017; Zetzsche et al., 2017), and investors place little
trust in voluntarily disclosed information around ICO campaigns (Blaseg, 2018; Rhue, 2018).
Third, similarly to the argument above, intermediaries may provide a delegated monitoring
function by which investors in DeFi markets may delegate monitoring power to intermediaries who
then make sure that the employed capital is used as efficiently as possible (Allen and Santomero,
1997; Becht et al., 2003). Delegated monitoring is arguably particularly pronounced in DeFi mar-
kets for startups, in which fractionalized, tokenized projects can be traded, and retail investors’
portfolios may include many tokenized projects, too many for the retail investors to monitor them-
selves. By delegating the monitoring function to an intermediary, investors can benefit from the
intermediary’s skills and resources thanks to the economies of scale for large, specialized crypto
funds. Similarly, intermediaries may provide a risk management and liquidity transformation func-
tion (Allen and Santomero, 1997). That is, crypto funds with specialized market knowledge and
investment experience may be better at hedging market risk than individual retail investors. This
helps with consumption smoothing. That is, retail investors desire stable flows of income and little
exposure to market-wide shocks. In addition, retail investors may hold under-diversified portfolios,
given the explosive growth of the ICO market. Investing in crypto funds deals with both issues at
the same time: Crypto funds provide active risk management and improve portfolio diversification.
Overall, specialized DeFi intermediaries can help reduce search frictions that are associated
with the initial search for investments and the subsequent search for information about the invest-
ments’ performance and prospects. Unlike individual investors, DeFi intermediaries benefit from
economies of scale that allow them to invest in blockchain-specific and financial human capital that
ultimately leads to a competitive advantage in information production and searching, a service for
which they can plausibly extract economic rents.

11
3.2 Hypotheses

3.2.1 Search-related Frictions Impede the Efficiency of DeFi Markets for Startups

Markets are thought to be efficient if those agents with the highest utility for an asset actually hold
the asset. DeFi markets are plausibly not perfectly efficient because search frictions impede the
reallocation of assets to the highest-value bidder in at least three different, search-related ways.
First, search frictions imply that DeFi markets for startups involve two-sided matching: Startups
conduct ICO campaigns to attract investors and investors, in turn, screen the market to identify
attractive startups for investment purposes. The time it takes to conduct ICO campaigns often
amounts to several months (Momtaz, 2020a), during which startup-investor matches are delayed.
Thus, the first way in which search frictions impede DeFi market efficiency is through a delay
in allocating tokens to the highest-value investors. Second, search is expensive, both through
the costs for startups in marketing crowdfunding campaigns to investors, and for investors (in
terms of both time and financial resources) to perform due diligence on potentially interesting
investment targets. These search-related transaction costs imply that some investments that would
be socially optimal in a frictionless economy will not take place if the search costs exceed the
expected transaction surplus. Therefore, the second way in which search frictions impede DeFi
market efficiency is in terms of an aggregate underinvestment in high-quality, tokenized startups.
Third, because the ICO market is characterized by high levels of asymmetric information and there
are limits to signaling, there is substantial uncertainty in the ICO market, which can cause financial
resources to be misallocated to undeserving tokenized startups. One way for this to occur is through
adverse selection (Hornuf et al., 2021) or moral hazard (Momtaz, 2021d). Thus, the efficiency
of the DeFi market for startups faces an obstacle in the form of overinvestments in low-quality,
tokenized startups.

Prediction 1: Search-related frictions impede the efficiency of the DeFi market for startups.

3.2.2 Specialized Intermediaries Mitigate Search Frictions in DeFi Markets for Startups

Crypto funds perform several important functions in token offerings. In particular, the activity of
crypto funds may reduce aggregate search effort in the market for tokens. Crypto funds screen the
market and invest in the best startups, signaling startup quality and certifying project legitimacy
(Fisch and Momtaz, 2020), which is informative for individual investors. Moreover, crypto funds
may also provide valuable services post-ICO, e.g., by monitoring management teams, thereby im-
proving entrepreneurial discipline and reducing problems often observed in the token market, such
as the under-provision of effort (Giudici and Adhami, 2019; Giudici et al., 2020; Malinova and
Park, 2018). Similarly, crypto funds may also help with post-offering crypto market making (Wang
et al., 2021b) and with cash/liquidity issues during market downturns (Russell, 2019), thereby
acting as an insurer against market risk from the perspective of individual investors. Importantly,
crypto funds are often believed to have more realistic expectations and more long-term goals than

12
individual investors, who are often thought to invest with the intention to turn a quick profit and
then move on, which helps startups to stay focused on the project rather than being distracted by
having to put effort into short-term investor relations (Russell, 2019).5
The liquidity of tokens provides intermediaries with two novel, search-related functions in en-
trepreneurial finance. First, the liquidity of tokens reduces the burden of venture capital funds’ to
identify and invest in “unicorns” to compensate for the relatively large number of failed projects
because liquid token markets allow crypto funds to exit at any time (Kastelein, 2017), which may
improve crypto funds’ disciplining ability of startups via threat of exit (Gompers, 1995; Yermack,
2017). Second, the increased number of players and liquidity in the cryptocurrency market allow
crypto funds to take advantage of mispricing and arbitrage opportunities through their sophisti-
cated trading strategies. For example, Makarov and Schoar (2020) document that cryptocurrency
markets exhibit periods of potential arbitrage opportunities across exchanges. Griffin and Shams
(2020) show that Bitcoin prices can be gamed and manipulated. Crypto funds therefore may also
be viewed as a safety guarantee that the token prices of the portfolio investment are less likely to
be manipulated in the aftermarket.
Intermediaries in DeFi markets for startups may also help improve the market’s risk-sharing
properties. DeFi markets are typically associated with relatively weak risk-sharing properties (Allen
and Gale, 1995, 2004). Cross-sectional risk sharing (i.e., risk sharing among different market
participants at one point in time) may be less efficient in DeFi markets due to the higher required
search effort. The problem may even be exacerbated by the fact that improved market participation
comes largely from low-end market segments (individuals and small businesses), which lack critical
search skills. Moreover, intertemporal risk sharing might be impaired in DeFi markets. The problem
is that different generations will be active in different DeFi market segments at different points in
time, implying that each generation must bear its full consumption risk (Allen and Gale, 2004).
Intermediaries may reduce this risk by averaging gains and losses across generations, but market
participants in granular DeFi markets may not do so themselves. As Allen and Gale (1995, p. 192)
conclude in their study of comparative financial systems, “at a theoretical level it seems that an
intermediated financial system can achieve a higher level of welfare than a market-based [i.e.,
DeFi] system.”
To summarize, specialized intermediaries, such as crypto funds, may overcome the problem of
excessive search in the context of asymmetric information (Cumming, 2008; Edmans and Holder-
ness, 2017). They have both the skills and resources to screen the market and produce information
about project quality, which in turn may result in certification effects observable to the broad market
(Hsu, 2004; Megginson and Weiss, 1991).

Prediction 2: Crypto funds mitigate search-related frictions in the DeFi market for startups.
5
Other related studies on investors in token offerings include Boreiko and Risteski (2021) and Fahlenbrach and
Frattaroli (2021).

13
4 Data and Methods

4.1 Data Sources

We rely on a sample from the Token Offerings Research Database (TORD).6 The TORD covers more
than 6,000 token offerings through December 2020, and provides a linking table to connect each
token offering to external data, such as historic token prices from Coinmarketcap. We supplement
the data with hand-collected variables, such as, in particular, human capital characteristics from
LinkedIn and institutional investor data from CryptoFundResearch.
Given our twofold empirical approach (i.e., juxtaposing reduced-form and structural estimates),
we have to construct two distinct samples. The first sample described in Section 4.2 is cross-
sectional. As such, it resamples the samples in related studies (e.g., Fisch, 2019; Momtaz, 2021d).
The final sample consists of 567 token offerings, for which we were able to retrieve all required
information.7 The second, described in Section 4.3, is longitudinal and its structure represents a
novel approach in the entrepreneurial finance literature. It covers the ICO market’s key dimensions
at an aggregate level, including 10,470 unique active ICO-month observations and 1,922 completed
ICOs. As described in Section 7, the longitudinal sample allows for structurally estimating the ICO
market model introduced in Section 6.

4.2 Cross-Sectional Sample for Regressions

The sample consists of 567 ICOs with complete information. Variables definitions and summary
statistics for the cross-sectional sample are below in Sections 4.2.1 and 4.2.2, respectively.

4.2.1 Variables

Dependent variable: Time-to-funding. The time, in days, between a successful ICO’s start and end
date. The variable is log-transformed.
Dependent variable: ICO firm valuation. Following existing studies on ICO performance (e.g.,
Fisch, 2019), we operationalize startup valuation as the logarithmic funding amount in $ acquired
during the token offering.
Independent variable: Intermediated. We proxy for whether an ICO was intermediated by check-
ing whether a Crypto Fund (CF) backed an ICO campaign. CF-backed ICOs are coded as one, and
zero otherwise.
Control Variables: Venture Characteristics

• Team size. The number of team members, which is a first-order determinant of success in
token offerings (Fisch, 2019; Momtaz, 2020a).
6
Retrieved from https://www.paulmomtaz.com/data/tord in June 2021.
7
A decrease in sample size with regard to the population size of token offerings is common in the literature. For
example, the samples of Lyandres et al. (2019) and Benedetti and Kostovetsky (2021) are reduced from 4,441 to 582
and from 2,390 to 283, respectively.

14
 • Technical experience. This is the percentage of team members with a technical background.
The variable is hand-collected from team members’ professional network profiles, such as
LinkedIn.

• Crypto experience. This is the percentage of team members with a background in crypto.
The variable is hand-collected from team members’ professional network profiles, such as
LinkedIn.

• Ph.D. This is the percentage of team members that hold a Ph.D. degree. The variable is
hand-collected from team members’ professional network profiles, such as LinkedIn.

• Rating. The overall project rating based on the consensus of industry experts on ICObench,
and is an important predictor of success in token offerings (Bellavitis et al., 2020; Fisch, 2019;
Momtaz, 2020a). The scale runs from 1 (“low quality”) to 5 (“high quality”).

Control Variables: Offering Characteristics

• Soft cap. A dummy variable for whether the startup has announced a soft cap in its token of-
fering. A soft cap is the minimum funding amount at which the offering is deemed successful,
and funding campaigns that fail to reach the soft cap typically redeem investor money and
end the project.

• Hard cap. A dummy variable for whether the startup has announced a hard cap in a token
offering. A hard cap is the maximum funding amount that a startup accepts. If the hard cap
is reached, the offering will end and excess funding will be returned to investors.

• KYC. This is a dummy variable that is equal to one if the ICO involved a Know-Your-Customer
(KYC) process, and zero otherwise.

• Pre-sale. A dummy variable indicating if the actual token offering was preceded by a pre-sale
event.

• Whitelist. A dummy indicating if the token offering has an active whitelist.

• # competing offerings. This is the number of competing ICOs, that is, ICOs whose offering
period overlaps with that of the focal ICO.

• ERC20. A dummy variable for whether the token offering relies on the technical ERC20
standard.

Fixed effects. Quarter-year and country fixed effects are always included to absorb time-varying
and jurisdictional variation.

15
4.2.2 Summary Statistics

Summary statistics for the cross-sectional sample are in Table 1, grouped by key variables, ICO-
related characteristics, and team-related characteristics. As per the key variables, 8.5% of all sample
ICOs are intermediated, the average (median) ICO firm takes 45 (55) days to successfully complete
the crowdfunding campaign, and it achieves an average (median) valuation of $9.3 million ($3.5
million). Apparently, the valuation proxy is positively skewed, which has important implications
for our modeling choices in Section 4. Further, 8.5 % and 89.1 % of all startups have institutional
investor backing and build their tokens on the Ethereum blockchain (e.g., the ERC20 technical
standard). As per the ICO-related variables, 89.1% of all ICOs are launched on the Ethereum
blockchain, 73.7% conduct a pre-sale, 78.3% have a Know-Your-Customer (KYC) process in place,
almost all have a whitelist, the average (median) hard cap is $139 million ($19 million), the aver-
age (median) soft cap relative to the hardcap amounts to 43% (15%), and the average (median)
ICO competes with 947 (875) concurrent campaigns. As per the team-related characteristics, the
average (median) ICO startup company receives a rating from industry experts of 3.6 (3.7) on a
scale from 1 (low quality) to 5 (high quality), has 15.2 team members, of which 2.3%, 0.4%, and
3.9% are graduates from a technical degree program (e.g., engineering or computer science), hold
a Ph.D., and have worked in the crypto industry prior to joining the startup, respectively.
Table 1 also reports the differences in sample means and sample medians to the correspond-
ing TORD-population moments in the last two columns. The differences are mostly significant.
Therefore, we weight our regression coefficients to be proportionate to the population moments,
as described in Section 5 below.

[Place Table 1 about here.]

4.3 Longitudinal Sample for Structural Estimation

The sample consists of 10,470 monthly ICOs observations and 1,922 completed ICOs with available
price and platform size information. Variables definitions and summary statistics for the longitudi-
nal sample are below in Sections 4.3.1 and 4.3.2, respectively.

4.3.1 Variables

Quantity Panel of ICO Market Activity per Month (# monthly obs. = 10,470).

• ICO firms’ platform size, in # users. The number of Twitter followers serves as a proxy for an
ICO firm’s underlying platform or network size. It is expressed as the average over all active
ICOs in a given month.

• Active ICOs. The number of active ICOs in a given month, that is, ICOs which are currently
open to receiving crowdfunding contributions in exchange for tokens.

16
 • Completed non-intermediated ICOs. The number of non-intermediated ICOs that are success-
fully completed in a given month and not backed by an intermediary.

• Completed intermediated ICOs. The number of non-intermediated ICOs that are successfully
completed in a given month and backed by an intermediary.

• Intermediaries’ cumulative token inventory. The cumulative number of ICO backings by inter-
mediaries in per month.

Price Panel (# completed ICOs = 1,922).

• Token prices in non-intermediated ICOs. The average total token price (analogue to the ICO
firm valuation) in ICOs that are not intermediated. This value is observed.

• Token prices in intermediated ICOs. The average total token price (analogue to the ICO firm
valuation) in ICOs that are not intermediated. This value is imputed from the token price
discount that intermediaries can plausibly demand, based on the second-stage regressions in
Table 4. The method is explained further below.

• ICO firms’ platform size, in # users. The number of Twitter followers serves as a proxy for an
ICO firm’s underlying platform or network size. It is expressed as the average over completed
ICOs during the 2017–2020 period.

4.3.2 Summary Statistics

Summary statistics for the longitudinal sample are in Table 2. The longitudinal sample reflects
demand and supply dynamics in the ICO market as a whole. Panel A describes aggregated statistics
for token quantity moments per month. A token offering enters the monthly panel as soon as the
startup starts selling tokens and exits the panel in the month in which the campaign ends. This
leads to 10,470 offering-month observations for the 2017–2020 period. Each month an average
of 360 (SD = 161) startups raise finance by selling tokens. Thereof, 348 (SD = 154) are not
intermediated, while 12.2 (SD = 9.6) are intermediated. The cumulative intermediated market
volume or the intermediaries’ cumulative token inventory, measured as the cumulative number of
intermediated ICOs, is 248 (SD = 91). As for ICO firms’ platform or network size, the average
startup has a followership on Twitter (our main proxy for network size) of 24,430 (SD = 136,751)
accounts, although the range is substantial (Q1 = 1,034; Q3 = 9,366), indicating pronounced
positive skewness. We will use this feature for identification of our model below.
Panel B of Table 2 shows price-related summary statistics for the longitudinal sample, which
is based on all completed token offerings over the 2017–2020 period with available information
on token valuation and network size. This results in a sample of 1,922 token offerings. Tokens in
non-intermediated ICOs are, on average, valued at $12.98 million in total (SD = $4.00 million),

17
while intermediaries are able to purchase them at a discount (see Section 5.3), resulting in aggre-
gate prices of $6.22 million (SD = $1.71 million). The average ICO firm’s platform size in these
transactions amounts to 8,334 (SD = 26,278) individuals.

[Place Table 2 about here.]

5 Regression Results
The goal in this section is twofold. The first objective is to estimate the causal effect of ICO inter-
mediation on the time to achieve a crowdfunding goal (i.e., the proxy for search frictions). While
the expected effect is negative because intermediaries plausibly help reduce search frictions, the
empirical relation is not free of endogeneity concerns. Specifically, it is possible that only ICOs with
strong success prospects are able to secure intermediation services, which could be confounding
any negative regression coefficient (i.e., a selection effect), rather than that intermediation being
the reason as to why those ICOs are able to achieve their funding goals in a shorter time period
(i.e., the treatment effect). The second objective is to estimate the causal relation between ICO
intermediation and token valuation. In particular, in the spirit of the growing body of anecdotal
evidence that intermediaries are able to extract significant economic rents in the form of token
discounts for their services (estimates often range between 50 and 70%),8 the goal is to estimate
the token value discounts that ICOs that are not able to secure intermediation services incur. En-
dogeneity issues might bias the expected negative, empirical relation between token valuation and
non-intermediation if low-quality issuers’ tokens trade at a discount because they are low-quality
and therefore unable to secure intermediation services, rather than because they lack intermedia-
tion in the first place.
Given these identification threats, we outline the econometric approach to debias the regression
models in Section 5.1, and present debiased regression results for the relation between interme-
diation and ICO duration in Section 5.2, and for the impact of non-intermediation on token value
discounts in Section 5.3.

5.1 Econometric Specification: Two-Stage Approaches to Mitigate Endogeneity

Several two-stage approaches help mitigate concerns about potential endogeneity pertaining to
sample selectivity.9 In particular, our approach to debias the treatment effects of intermediation
mitigates selection based on unobservables, which are potentially pronounced confounders in en-
trepreneurial finance.10
8
See, e.g., https://icodrops.com/pre-sales/, https://www.cointelligence.com/content/private-sales-icos/, https://
medium.com/applicature/private-sale-or-public-sale-b515476718a3, all retrieved on February 24, 2022.
9
The techniques used in our study have been employed before in similar contexts (e.g., Bertoni et al., 2011; Colombo
et al., 2021; Colombo and Grilli, 2010; Fisch and Momtaz, 2020; Momtaz, 2021c).
10
For example, unobserved heterogeneity in startups’ time-to-funding by venture capitalists can be so pronounced
that it biases common time-to-event models (Momtaz, 2021b).

18
 The general approach is to estimate a first-stage model that predicts the probability that an
ICO is intermediated or non-intermediated. These “selection probabilities” are then transformed
and included in the second-stage models, which estimate the treatment effects. Specifically, we are
interested in two distinct treatment effects; namely, the treatment effect of intermediation on the
time it takes ICO firms to achieve their crowdfunding goals and the treatment effect of the lack of
intermediation on token valuation. Equations 1 and 2 represent the potentially confounded OLS
models:
ICO durationi = β × 1Intermediated i + Ωi γ + εi (1)

Token valuationi = β × 1Non-intermediated i + Ωi γ + εi (2)

where i indexes ICOs, 1Intermediated i and 1Non-intermediated i represent indicator variables for whether
or not ICO i is intermediated, and Ωi represents a vector of control variables.
For the models in equations 1 and 2 to estimate an unbiased treatment effect of ICOs’ inter-
mediation status, it is necessary to assume that the independent variables are orthogonal to the
error term, i.e. E[Ωi , εi ] = 0. This condition is violated if selectivity is present; for example, in
the case that only high-quality ICOs are able to secure intermediation services. Therefore, the first
stage explicitly models the selective matching between ICO firms and intermediaries. Specifically,
we predict that ICO i is intermediated, 1Intermediated i , by a vector of exogenous control variables
(s)
that possibly influence the selection mechanism, Ωi :

1Intermediated i = Ωi(s) δ + ξi (3)

Estimates from equation 3 help control for unobserved heterogeneity as follows. We use Gener-
alized Residuals (GRs) both as explicit controls for selection-based endogeneity, and as instrumental
variables for ICOs’ intermediation status (Gourieroux et al., 1987), which controls for unobserved
heterogeneity by explicitly modeling any endogeneity in the error term, defined as follows:
   
(s) (s)
ϕ −Ωi δ −ϕ Ωi δ
GRi = 1Intermediated i ×   + (1 − 1Intermediated i ) ×   (4)
(s) (s)
1 − Φ −Ωi δ Φ −Ωi δ

where ϕ (.) and Φ(.) denote the probability density and the cumulative density functions of the
standard normal distribution, respectively. We restrict the standard deviation of the error term for
intermediated (σε, 1Intermediated i ) to be equal to that of non-intermediated ICOs (σε,1Non-intermediated i ). The
restriction ensures that GRi can be added as an instrumental variable to equation 1.
For equation 2, the adjustments are identical, with the exception that “selection probabilities”
are estimated for the case that ICO i is not intermediated, i.e. 1Non-intermediated i .

19
5.2 Regression Results: Intermediation and ICO Duration

Table 3 shows the regression results for how ICO intermediation impacts ICO duration. All models
include quarter-year and country fixed effects to absorb both time-related and geographical vari-
ation. All reported standard errors are robust. The selection model for equation 3 is in column
(1), with an indicator variable for whether an ICO is intermediated as the dependent variable. Our
baseline regression results for equation 1 are presented in column (2), with the natural logarithm
of the time between ICO start and end in days as the dependent variable. The second stage re-
gression results are shown in columns (3) and (4), with the generalized residual, as measured in
equation 4, as an added control and as an instrumental variable for the intermediation indicator,
respectively. In particular, these approaches outperform matching-on-observables in our context
because they do not require ICO intermediation to be independent of unobserved factors and the
marginal probability of ICO intermediation does not need to equal the average probability. Finally,
given the sample population differences reported in Table 1, we weight all regression coefficients
by the inverse of the (absolute value) sum of relative deviations from population means for each to-
ken offering to move our estimates of the local treatment effect in our sample closer to the average
treatment effect in the population of ICOs.
The results suggest that the effect of ICO intermediation on ICO duration is significantly neg-
ative throughout all models in columns (2) to (4). The coefficients range from –0.273 to –0.287,
statistically highly significant with p-values consistently below 1%. The similarity of these coeffi-
cients may imply that selectivity does not significantly bias the causal effect of ICO intermediation
on ICO duration. Indeed, the adjusted R2 for the selection model in column (1) is relatively low
(1.8%). Overall, the marginal effect of ICO intermediation on ICO duration is a relative decrease
in the time it takes for intermediated ICO firms to achieve their crowdfunding goals of –24.9%
(exp(–0.287)–1). This strongly supports the overarching hypothesis that intermediaries help re-
duce search frictions in the ICO market.
For the selection model, the coefficients of the control variables largely show plausible effects,
suggesting that (i) the number of competing offerings is negatively associated with the probability
of ICO intermediation, while (ii) the relative amount of team members with a technical background
or (iii) a Ph.D. degree have positive effects.
For the key models in columns (2) to (4), the coefficients of the control variables also appear
plausible, suggesting that (i) pre-sales and (ii) the number of competing offers increase the time it
takes ICO firms to achieve the crowdfunding goal, while (iii) the size of the soft cap and (iv) the
percentage of team members with a Ph.D. degree decrease the duration. It is noteworthy that the
coefficients of the control variables are consistent in terms of both the signs and the magnitudes
across columns (1) to (3).
Overall, the results in Table 3 suggests that ICO firms have an economic motive to secure inter-
mediation for their offerings to reduce their time-to-funding.

[Place Table 3 about here.]

20
5.3 Regression Results: Lack of Intermediation and Discount on Token Value

Table 4 presents regression results for the effect of ICO intermediation on token valuations. In par-
ticular, we test whether tokens offered in non-intermediated ICOs trade at a relative discount. The
tests are similar to those in Table 3, with the difference that the dependent variables are replaced
for an indicator variable for non-intermediated ICOs in column (1) and the natural logarithm of
token valuations in $ million in columns (2) to (4). The models also include quarter-year and
country fixed effects, and the standard errors are robust. Columns (3) and (4) show second-stage
regressions that control for unobservable heterogeneity by controlling for the generalized residuals
in column (3) and for instrumenting the indicator variable for non-intermediated ICOs with the
generalized residuals in column (4).
The results suggest that tokens offered in non-intermediated ICOs trade at a significant discount.
Specifically, the average non-intermediated ICO offers tokens at a discount of up to –57.7% (exp(–
0.861)–1) in the IV model in column (4). The coefficient estimates for our key variable ranges
from –0.793 to –0.861, which are highly statistically significant, with p-values consistently below
1%. It is noteworthy that the key coefficient of the control model (–0.793) is clearly different from
that in the GR and IV models (–0.850 and –0.861, respectively), indicating that the selection of
intermediated vs. non-intermediated ICOs would underestimate the token valuation effect in the
absence of the adjustments in columns (3) and (4).
Note that the adjusted R2 is similarly high as in related studies (Bellavitis et al., 2020; Bellavitis
et al., 2022; Fisch, 2019), and the control variables also seem to be consistent. Specifically, (i)
expert ratings, (ii) soft cap amounts, (iii) hard cap amounts, (iv) whitelists, (v) the number of
ICO team members, and (vi) the relative amount of team members with prior crypto-industry
experience are positively related to ICO token valuations. In contrast, (vii) only the percentage
of technical team members has a negative effect. These estimates are consistent across all model
specifications in columns (2) to (4).
Overall, the non-intermediated ICOs offer tokens at dramatic ceteris paribus discounts of up
to –57.7%, which is consistent with anecdotal evidence that reports discounts in the range of 50
to 70%. This implies that the average non-intermediated ICO issuer “leaves money on the table”
to the amount of $5.34 million. By implication, the causal nature of these results suggests that,
in competitive DeFi markets, intermediaries can charge very high fees commensurate with the
estimated discounts for their intermediation services, an interpretation that we will use to identify
our theoretical model below.

[Place Table 4 about here.]

To summarize the reduced-form evidence in sections 5.2 and 5.3, ICO intermediation is causally
related to the time it takes ICO firms to achieve their crowdfunding goals and token valuation
discounts, respectively. Therefore, the results offer initial supporting evidence for the overarching
conjectures that intermediation helps reduce search frictions in ICO markets, and intermediaries
can charge substantial fees for their services.

21
6 Model

6.1 Set-up: The ICO Market

We model the DeFi market for startups, i.e. the ICO market, as a decentralized search-and-
bargaining market populated by individual investors and intermediaries who discount the future
at rate ρ > 0. The key difference between the two investor types is that only individual investors
enjoy a flow utility from holding a specific token (e.g., the token may be used as a membership fee
for a video gaming online community, or to purchase cloud storage to save electronic files, or for
any other purpose), while intermediaries act as mere middlemen that extract economic rents from
reducing market frictions. The model is set in continuous time with an infinite horizon.11
Individual investors (henceforth, individuals, for brevity, indexed by i) are assumed to be
risk neutral. At every instant, a mass µi of high-valuation individuals with token valuation zh > 0
enters the ICO market. Their valuation drops to zl < zh and they become low-valuation individuals
with intensity λ, obeying a continuous-time Markov chain. Because individuals’ valuations are
µi
independent, there is a mass of λ high-valuation individuals in steady state.
Intermediaries (indexed by m for “middlemen”) enter the ICO market as an (endogenous)
mass µm , and we assume that market entry is free. µm m
t (l) and µn (l) denote the endogenous masses
of intermediated and non-intermediated ICOs of a platform of size l, respectively. We discuss
the role of platform size below. Because intermediaries do not enjoy utility from holding utility
tokens, they serve as potential transaction parties independent of any token-valuation parameter.12
Intermediaries have operating costs κ.
Tokens. We assume that entrepreneurs launch ICOs such that tokens enter the market at every
instant as a mass of x < µi and transacts at endogenous price p∗ . Tokens are heterogeneous with
respect to their underlying platform size and are generically ranked, such that l = 1...100 (1 =
largest platform percentile, 100 = smallest platform percentile). Token value decreases in l and has
a salvage value s ≥ 0. A worthless token can also be scrapped free-of-charge at any point in time.
Platform size matters because it relates to network effects, which ultimately determine token value
µi
(Chen and Bellavitis, 2020; Fisch, 2019). We require λ > P , where P represents the total amount
of platform tokens in the market, so that, in a Walrasian market, the marginal token-holder is of
the high-valuation type. Instantaneous flow utility π(z, l) is a function of a token’s platform size l
and its holder’s valuation z. Utility is increasing in valuations ( δπ(z,l)
δz > 0), decreasing in token’s
platform size ranking ( δπ(z,l)
δl , 0) (i.e. smaller platform, lower token value), and it has negative z-l
δπ(zh ,l) δπ(zl ,l)
complementarity such that δl < δl .
Search. Individuals pay a search-related costs cs to find token transaction parties at pairwise
independent Poisson arrival rates γ > 0. Therefore, an individual wishing to sell a token meets a
11
Weill (2020) offers an excellent overview of related work on search theory. Our analysis follows Gavazza (2016),
combining elements from Duffie et al. (2005) and Rubinstein and Wolinsky (1987).
12
Intermediaries do not invest in more than one platforms at once. This assumption largely simplifies the model,
and corresponds closely to statistics about institutional investor involvement in the ICO market, e.g., Fisch and Momtaz
(2020).

22
potential buyer at rate γ i-s = γµi-b , and an individual looking to buy a platform-size-l token meets
a potential seller at rate γ i-b (l) = γµi-s (l). The masses µi-b (l) and µi-s (l) are determined in equilib-
rium. Similarly, individuals meet intermediaries at pairwise independent Poisson arrival times with
intensity γ ′ > 0. An individual wishing to purchase a platform-size-l token meets a platform-size-l
token-holding institutional at rate γ i-b (l) = γ ′ µm
p (l), and intermediaries meet individuals to sell
their tokens at rate αm-s = γ ′ µi-b . The sum of γ m-b and αm-s represents the combined search inten-
sity at which buying individuals and selling intermediaries meet. Similarly, γ m-s and αi-b (l) express
the search intensities with which selling individuals meet intermediaries and buying intermediaries
meet individuals wishing to sell platform-size-l tokens.
Bargaining. Meetings between matching buying and selling individuals or with intermediaries
lead to price negotiations according to a generalized Nash bargaining framework. The param-
eters θi-s ∈ {0, 1} and θm ∈ {0, 1} denote the relative bargaining power of the seller in a non-
intermediated ICO and of the institutional in an intermediated ICO, respectively. Thus, we assume
symmetric information about token quality, which is why we estimate the model based on residual
prices after controlling for determinants of token value other than platform size in Section 7.

6.2 Value Functions

6.2.1 Individual Investors

We distinguish four types of individual investors in our model. Individuals can have a high (zh ) or
low (zl ) token valuation, and own or do not own the respective token. Further, individual investors
who own a token decide between keeping or selling it, while individual investors who do not hold
a token decide between actively trying to purchase tokens in the market or not. We now derive
value functions for each individual investor type.
Individuals of type zh with token. An individual with valuation zh holding a platform-size-l
token continuously chooses between keeping or selling the asset.

• Consider first the case of an individual who is not seeking to sell the token. The individ-
ual enjoys the current flow utility π(zh , l) from holding a high-valued token. Her valuation
switches to zl < zh at rate λ. At a value-depreciation event, the individual faces the decision
i (l), S i (l)}, that is, choosing between the utility from a low-valued token
problem max{Ulo lo
and the proceeds from selling it. Finally, token-holders may incur a platform-size-related (or
i (l)/δl. Hence, the individual’s value
network-related) capital change in the amount of δUho
function satisfies the following Bellman equation:

i i i i i
ρUho (l) = π(zh , l) + λ[max{Ulo (l), Slo (l)} − Uho (l)] + δUho (l)/δl (5)

• Similarly, the high-valuation holder of a platform-size-l token may actively try to sell the
asset. Like the individual who prefers to keep the token, the individual who prefers to sell it
i (l), S i (l)} when
enjoys the current flow utility π(zh , l), faces the decision problem max{Ulo lo

23
 i (l)/δl. Moreover,
her valuation drops, and sustains capital change due to network effects δSho
she faces the flow search cost cs . She meets potential buyers at rate γ i-s , at which point she has
to decide between selling the token at price p(l) and becoming a high-valuation non-holder
with value Vhn , or keeping it. Selling it results in the capital gain p(l) +Vhn −Sho (l). Similarly,
the individual meets investors at rate γ m-s , at which point she has to decide whether to accept
the investor’s bid price pB (l). Thus, the value function of the high-valuation individual who
is actively trying to sell her token satisfies the following Bellman equation:

i i i i i
ρSho (l) = π(zh , l) + λ[max{Ulo (l), Slo (l)} − Sho (l)] + δSho (l)/δl (6)
+ cs
+ γ i-s max{p(l) + max{Uhn , Shn } − Sho (l), 0}
+ γ m-s max{pB (l) + max{Uhn , Shn } − Sho (l), 0}

Individuals of type zl with token. Low-valuation token-holding individuals can also choose
between keeping and selling the asset.

• In the former case, because zl is an absorbing state and valuations cannot switch anymore,
her value function satisfies:

i i
ρUlo (l) = π(zl , l) + δUlo (l)/δl (7)

• In the latter case, the conditions for the value function directly follow from equation 8 and
the fact that zl is an absorbing state:

i i
ρSlo (l) = π(zl , l) + δSlo (l)/δl (8)
+ cs
+ γ i-s max{p(l) + max{Uln , Sln } − Slo (l), 0}
+ γ m-s max{pB (l) + max{Uln , Sln } − Slo (l), 0}

Individuals of type zh without token. Individuals who do not own tokens can either passively
remain in their ownership status or actively try to purchase tokens in the ICO market.

• High-valuation individuals who neither hold a token nor are actively trying to purchase one
in the market have zero utility:

ρUhn = 0 (9)

• High-valuation individuals who do not hold a token but are actively looking to purchase one
in the ICO market pay a search cost cs and incur a capital loss of λ(max{Uln , Sln } − Shn )
when their valuation drops. Because they cannot be sure of the ultimate platform size l that

24
 is up for sale when the individual encounters a potential transaction partner, but which is
highly value-relevant, she takes the expectations over all platform sizes. She meets a selling
individual at rate γ i−b and a selling investor at rate γ m−b and experiences a capital gain of
max{Vho (l) − p(l) − Shn , 0} and max{Vho (l) − pA (l) − Shn , 0}, respectively.

ρShn = −cs + λ(max{Uln , Sln } − Shn ) (10)

Z
+ γ i−b (l)max{Vho (l) − p(l) − Shn , 0}dl
Z
+ γ m−b (l)max{Vho (l) − pA (l) − Shn , 0}dl

Individuals of type zl without token. Similarly to type-zh individuals without token owner-
ship:

• Low-valuation individuals who neither hold a token nor are actively trying to purchase one
in the market have zero utility:

ρUln = 0 (11)

• Low-valuation individuals who do not hold a token but are actively looking to purchase one
in the market pay the deterministic search cost cs . Like the high-valuation non-holders, the
low-valuation individual takes the expectations over all platform sizes. She meets a selling
individual at rate γ i−b and a selling intermediary at rate γ m−b and experiences a capital gain
of max{Vlo (l) − p(l) − Sln , 0} and max{Vlo (l) − pA (l) − Sln , 0}, respectively.

ρSln = −cs (12)

Z
+ γ i−b (l)max{Vlo (l) − p(l) − Sln , 0}dl
Z
+ γ m−b (l)max{Vlo (l) − pA (l) − Sln , 0}dl

6.2.2 Intermediaries

Because intermediaries do not enjoy flow utility from holding tokens, there are only two types:
intermediaries that currently hold tokens and those that currently do not hold tokens. However,
they can extract economic rents, inter alia, by reducing the delays at which individuals can buy and
sell tokens.
Intermediaries with token. A platform-size-l token-holding intermediary pays the flow oper-
ating cost κ, and decides between selling the token for ask price pA (l) and realizing capital gain
pA (l)+Jn −Jo (l) net of any network-related effects on capital or realizing the salvage value (e.g., re-
turn tokens in case a hard-cap goal was not met in the offering). The token-holding intermediary’s

25
value function satisfies the following Bellman equation:

ρJo (l) = max{−κ + αins−s [pA (l) + Jn − Jo (l)] + δJo (l)/δl, ρJn } (13)

Intermediaries without token. The value function of the token-nonholding intermediary is

characterized by the flow operating cost κ that the intermediary incurs while actively searching for
a potential transaction and the expectation over the platform sizes when the intermediary meets
a seller at rate αm−b and realizes a capital gain in the amount of max{Jo (l) − pB (l) − Jn , 0}. It
satisfies:
Z
ρJn = −κ + αm−b (l)max{Jo (l) − pB (l) − Jn , 0}dl (14)

Note that the free-entry condition implies that intermediaries’ expected capital gains is exactly
offset by their operating cost in the latter equation.

6.3 Prices

Following the literature (e.g., Gavazza, 2016; Weill, 2020), we solve for the endogenous price in
the non-intermediated ICO market segment via generalized Nash bargaining:

i i
p(l) = argmax[Uho (l) − p(l) − Shn ]1−θ [p(l) + Vln − Slo (l)]θ (15)

subject to Uho (l) − p(l) − Shn ≥ 0 and p(l) + Vln − Slo (l) ≥ 0.

This yields the endogenous price:

p(l) = (1 − θi )(Slo (l) − Vln + θi (Uho (l) − Shn ) (16)

The ask price pA (l) and bid price pB (l) are determined in a similar fashion:

pA (l) = (1 − θm )(Jo (l) − Jn ) + θm (Uho (l) − Shn ) (17)

pB (l) = (1 − θm )(Jo (l) − Jn ) + θm (Slo (l) − Vln ) (18)

6.4 Policies

6.4.1 Individual Investors

Surplus rents from trade arise when zh -type individuals without token ownership meet zl -type
token-holders. Those surplus rents from trade are higher for tokens with relatively large underlying
platforms due to the negative complementarity between the input factors of flow utility π(z, l). By
implication, not all tokens are reallocated in equilibrium, which helps simplify the analyses.

26
 We can reformulate the value functions of zh -type token-holding individuals:

U (l) for l < l∗
ho ho
Vho (l) = (19)
S ∗
for l ≥ lho
hn

Equation 19 follows from δUho (l)/δl < 0. Because the utility zh -type individuals derive from
∗ at which token-holders
holding platform-size-l tokens is decreasing in l, there must be a cutoff lho
decide to realize the salvage value Shn . Therefore, Uho (a∗ho ) = Shn . Likewise, such a cutoff also
exists for zh -type token-nonholding individuals at which they decide to purchase a platform-size-l
token. Therefore, we have a∗ho ≥ a∗hn , with a potential wedge from trading frictions. Thus, token-
nonholding zh -type individuals have the value function Vhn = Shn .
The value function of token-holding zl -type individuals can be simplified as follows:

S (l) for l < ll∗
 lo


Vlo (l) = Ulo (l) for l ≤ ll∗ < L (20)


for l = L

V
ln

Equation 19 follows from δUlo (l)/δl < 0 and the fact that cs is constant. Therefore, there
exists a cutoff ll∗ such that a zl -type individual decides to sell her token if it is below the cutoff
and keep it if it is above the cutoff, respectively. If she keeps the token, then she holds it until she
can realize the salvage value at L. Further, equilibrium considerations dictate that token-holding
∗ .
zl -type individuals sell to purchase-willing zh -type individuals, implying ll∗ ≤ lhn
Finally, because zl is an absorbing state, the value function of token-nonholding zl -type individ-
uals is Vln = y where y represents the value of the smallest platform.

6.4.2 Intermediaries

Intermediaries prefer tokens with larger underlying platforms because they trade at greater mar-
gins, but intermediaries’ operating costs κ are constant. Therefore, intermediaries purchase platform-
∗n and realize the salvage value at l∗o > l∗n .
size-l tokens such that l ≤ lm m m
∗o ≤ l∗ , that is, intermediaries always sell to purchase-
Equilibrium considerations also dictate lm hn
willing individuals.

6.5 Distributions of Individual Investors and Intermediaries

6.5.1 Laws of Motion for Individual Investors

Differential equation 21 describes the evolution of platform-size-l token-holding zh -type individ-

uals over time. The mass evolves as non-holding zh -type individuals meet selling platform-size-l
token-holding individuals (γb (l)µhn ) or platform-size-l token-holding intermediaries (γbd (l)µhn ),

27
and platform-size-l token-holding individuals switch valuations to the absorbing state zl (λµho ).

∗
µ̇ho (l) = γb (l)µhn + γbd (l)µhn + λµho (l) for l < lho (21)

Similarly, equation 22 describes the evolution of platform-size-l token-holding zl -type individ-

uals over time. It is affected by inflows from token-holding individuals with underlying token-
∗ (because these individuals would just realize the salvage value if their to-
platform sizes l < lho
kens were based on a smaller platform) whose valuations just switched to the absorbing zl -state
(λ1l<lho ∗
∗ µho (l)), and the outflow of zl -type holders of tokens with networks greater than l (holders
l
of tokens with those platform sizes would prefer to sell rather then keep it) who meet purchase-
willing individuals (γs 1l<ll∗ µlo (l)) or intermediaries (γsd 1l<min{ll∗ ,ldn
∗m } µlo (l)).

µ̇lo (l) = λ1l<lho

∗ µho (l) − γs 1l<l∗ µlo (l) − γsd 1
l
∗m } µlo (l) for l < L
l<min{ll∗ ,ldn (22)

Z ll∗ Z ∗m
ln
∗
µ̇hn = µ − x + µho (lho ) − λµhn − µhn γb (l)dl − µhn γbm (l)dl (23)
0 0

Z ll∗ Z min{ll∗ ,ln

∗m }

µ̇ln = λµhn + γs γlo (l)dl + γsm µlo (l)dl + µlo (L) (24)
0 0

6.5.2 Laws of Motion for Intermediaries

Similar logic gives the laws of motion for intermediaries in the model:

o (l) = αb (l)1l<ln
∗m
µ̇m ∗m µ
m m m
n − αs µo (l) for l < lo (25)

Z lo∗m Z min{ll∗ ,ln

∗m }
∗∗m
µ̇dn = αsm µm m
o (l)dl − µn αbm (l) + µm
o (ln ) (26)
0 0

7 Structural Estimation
This section describes how we estimate and identify the model of the ICO market described in
Section 6. It also reports key parameter estimates, including search costs, transaction surplus,
and rent sharing between individual investors and intermediaries. Finally, we benchmark the ICO
market to the perfectly efficient Walrasian equilibrium to quantify the effect of market frictions on
aggregate welfare created in the ICO market.

28
7.1 Estimation

We calibrate the model as follows: The discount rate is ρ = 0.5%, the total mass of ICOs is set
to equal the sample median, and the average number of active intermediaries, µd , is set to the
sample mean. ICOs differ in their underlying network size. All ICOs’ network sizes are ranked by
percentiles from 1 (largest) to 100 (smallest). The unit of time, at which we estimate the model,
is set to months, covering 48 months during the 2017–2020 period. The salvage price is S = $0,
stipulating that platforms without users are worthless.
Tokenholders’ flow payoff equals π(z, a) = ze−δ2 a . We estimate the vector ψ = {λ, γs , γsd , αds , zh , zl , δ2 , cs , θs , θd }
The endogenous contact rates {γs , γsd , αds } can be inferred from the data and help identify other
parameters of the model, which in turn jointly determine individual investor’ and intermediaries’
policy functions and distributions.
The following ICO moments, mICO (ψ), are computed based on the model’s solution:
R a∗l R a∗
µlo (a)da+ 0 do µdo (a)da
• The fraction of tokens for sale, mICO [1] = 0
A
R a∗do
µdo (a)da
• The cumulative number of intermediated ICOs relative to all ICOs, mICO [2] = 0
A
R a∗l
γS µlo (a)da
• Fraction of active non-intermediated ICOs, mICO [3] = 0
A
R a∗do
αds µdo (a)da
• Fraction of active intermediated ICOs, mICO [4] = 0
A
R a∗l R a∗do
aµlo (a)da+ aµdo (a)da
• Average ranking of ICO platform’s underlying network size, mICO [5] = 0
R a∗l
0
R a∗do
0 µlo (a)da+ 0 µdo (a)da

Further, six price moments, mprice (ψ) = {β0 , β1 , β2 , β3 , β4 , β5 }, are obtained from nonlinear
least squares from the following two auxiliary regressions:

• p(a) = β0 + β1 e−β2 l

• p(a) = β3 + β4 e−β5 l

Then, we estimate ψ via the two-step estimator from Hansen (1982).

m(ψ) − ms ′ m(ψ) − ms
ψ̂ = argminψ∈Ψ ( ) Ω(ψ̃)( ) (27)
ms ms

where ms denotes the simulated token offering and price moments, and Ω(ψ̃) is the consistent
m(ψ)−ms
estimate of the asymptotic variance-covariance matrix of the moments, and we use ms to
have a similar scale.

29
7.2 Identification

Identification follows largely the multidisciplinary search literature, including labor (Eckstein and
Van den Berg, 2007) and decentralized real asset markets (Gavazza, 2016). ICO moments iden-
tify the transition rates between states. The fraction of non-intermediated ICOs identifies the rate
at which individuals meet, γs , while the fraction of intermediated ICOs identifies intermediaries’
contact rates, αds . The cumulative number of intermediated ICOs identifies the rate at which indi-
viduals meet intermediaries, γsd . Furthermore, the Markov-chain parameter that governs inventors’
valuation changes, λ, is identified by the total fraction of active ICOs in any given instant.
The valuation parameter and the endogenous moments together with the fixed parameters A
RT
and µd and the steady state condition µλ = 0 µho (l)dl then allow to infer the efficiency parameters
of the matching functions, γ and γ ′ , and the mass of new market entrants, µ. Specifically, we solve
for µho (l) in equation 21, µlo (l) in equation 22, and µdo (l) in equation 25.
To identify the remaining parameters {δ2 , zh , zl , θs , θd , cs }, we use the price moments and the
fifth transaction moment that characterizes the average platform’s underlying network sizes of
the marketed ICOs. The price equations identify the value depreciation parameter, δ2 , from price
variations across tokens of different underlying network size.
We follow Gavazza (2016) to identify bargaining and valuation parameters who suggests to
exploit differences between the prices in intermediated and non-intermediated ICOs, as well as
the vertical heterogeneity of the token network sizes. β0 and β3 in the price regressions identify
high-z non-tokenholders’ value of continuing to search, Shn , which is their outside option in Nash
bargaining with equilibrium prices. Because non-tokenholders do not know the token’s underlying
network size of the token of the tokenholder they meet next, Shn does not depend on the token’s
underlying network, and hence the intercepts from the price regressions are sufficient for identi-
fication. Shn depends on valuations {zl , zh } and bargaining parameters {θs , θd }. Shn is negative
if the transaction surplus is exclusively appropriated by selling individual and intermediaries. Shn
increases in the combined buying individuals’ bargaining power, (1 − θs ) and (1 − θd ). This also
implies that the price regression intercepts identify valuations and bargaining parameters. Token-
holders’ flow payoff, π(z, a) = ze−δ2 a , and the negotiated prices imply that β1 and β4 also help
identify valuations and bargaining parameters.

[Place Figure 3 about here.]

The average network size of marketed tokens identifies the flow search costs, cs . Search costs
matter for sellers when they face the decision to market the token, however, they do not matter
when they meet potential buyers and negotiate, as they are sunk by then. Transaction surplus is
larger for low-l ICOs because buyers are able to extract higher rents from network effects. This
implies that the average ranking identifies cs because high-l tokens are only put on the market in
the presence of sufficiently low search costs.
Intermediaries’ fixed costs, κ, are easily identified from their bid-ask spread and their trading
rates because we stipulated free market entry for institutional investors.

30
7.3 Parameter Estimates

Parameter estimates are in Table 5. Changes in valuation occur with intensity λ = 0.0624, suggest-
ing that high-valuation individuals switch to low-valuation investors for a particular platform on
1
average every 16 ( 0.0624 ) months, which seems to be a reasonable estimate in an intermediated
ICO market (Fisch and Momtaz, 2020). The contact rates for selling individuals meeting buying
individuals and buying intermediaries is γs = 0.2169 and γsd = 0.2537, respectively. In contrast, the
estimated contact rate for intermediaries, αds = 0.7099, suggests that intermediaries are able to
sell tokens significantly faster. Overall, these estimates indicate that search frictions for individuals
are sizable in the market for tokens, and that intermediaries are able to reduce such trading delays
by 33.7%. This estimate closely corresponds to the reduced-form estimate in Section 5.2 that in-
termediated ICOs help startup firms achieve their crowdfunding goals 25% faster, which is a first
reconfirming observation in support of the model’s overall fit.
To better understand the estimates, we use these endogenous contact rates to infer individuals
(γ) and intermediaries (γ ′ ) pairwise contact rates (not tabulated). The results are γ = 0.0009 and
γ ′ = 0.0030. Hence, intermediaries’ pairwise meeting rate is significantly higher, explaining how
intermediaries help reduce frictions associated with trading delays.
The valuation differences between sellers and buyers are large. In particular, the difference in
the average type-zh and the average type-zl sellers’ ICO valuations is $0.65 million, with a very
low zl -type valuation, which is consistent with the notion that selling individuals have no use for
the token’s platform. These estimates indicate that gains from trade in the market for tokens are
sizable. Again, the large valuation differential lends support to our reduced-form estimates for
token valuation in Section 5.3, also supporting the model’s overall fit.
Compared to the average sell-side token valuation, flow search costs are relatively large. The
cs parameter is $23,124. Therefore, search costs associated with a completed ICO are on average
cs
$49,137 ( γs +γ sd
), which represents almost 90% of the seller’s value of the tokens. Thus, search
costs for sellers appear to be pronounced in the ICO market.
The bargaining parameters, θs and θd , indicate that rent sharing depends on whether an ICO
is non-intermediated or intermediated. Rent sharing in non-intermediated transactions favors the
buyer who appropriates roughly two-thirds of the transaction surplus, perhaps indicative of the fact
that selling individuals reveal their zl type which hurts bargaining power. In intermediated ICOs,
however, intermediaries are able to pocket an even larger share of the transaction surplus. This
is consistent with the notion that intermediaries are more experienced and hence sophisticated
negotiators than inventors (γ ′ > γ) (Green et al., 2007a, 2007b).
Finally, we also use the estimates in Table 5 to compute the costs of market making, which are
the intermediaries’ fixed costs (κ, not tabulated). These costs should be nontrivial because of the
free-entry condition. Indeed, we find that they are $2.56 million per year.
Overall, these estimates support the view that market frictions are relatively salient in the ICO
market, and that the model seems to describe aggregate ICO market dynamics relatively well.

31
 [Place Table 5 about here.]

7.4 Model Fit

We now examine the model’s overall fit moore formally. In particular, we contrast empirical ICO-
related quantity moments from the data with simulated moments from the model in Table 6. The
simulated transaction moments match those in the data relatively well. The average absolute
percentage deviation is 0.6%. This means that the model is very good at predicting aggregate ICO
market transactions.

[Place Table 6 about here.]

7.5 Aggregate Findings: ICO Market Efficiency

The ultimate goal of the structural estimation is to produce insights into how efficient DeFi markets
are in aggregate, with an application to the ICO market. To this end, we estimate the Walrasian
market as a benchmark for the actual ICO market. The counterfactual Walrasian ICO market as-
sumes that there are no market frictions and, as a consequence, tokens are only held by the highest-
valuation investors. To compute the Walrasian counterfactual, we let the contact rates approach
infinity, γ → ∞, and stipulate that there are no search costs, cs = 0. Intuitively, in the case of
Walrasian efficiency, non-tokenholding type-zh investors immediately transact with tokenholding
type-zl investors when they enter the market. That is, in equilibrium, no type-zl investor holds a
token and intermediaries have no inventory, that is, µW
i (l) = 0 ∀ l, i ∈ {lo, do}.
We can now compare the actual estimated market to the Walrasian benchmark. The key findings
are in Table 7. Market efficiency in the counterfactual Walrasian ICO market is normalized to 100%.
Relative to the Walrasian benchmark, the overall ICO market achieves a market efficiency of 52%.
Therefore, search-related inefficiency causes a welfare loss to ICO market participants of 48%.

[Place Table 7 about here.]

8 Discussion and Concluding Remarks

8.1 Summary of Main Results

This paper examines the efficiency of the Decentralized Finance (DeFi) market for startups by test-
ing two overarching hypotheses. The Disintermediated Inefficiency Hypothesis (DIH) posits that
DeFi markets for startups are relatively inefficient because of search-related frictions, while the In-
termediated Efficiency Hypothesis (IEH) suggests that new DeFi intermediaries, especially crypto
funds, help partially restore the market’s efficiency. We test the DIH and IEH in the empirical
context of Initial Coin Offerings (ICOs). ICOs are the largest DeFi market segment for startups
(Bellavitis et al., 2021), and are particularly interesting because, despite blockchain technology’s

32
ability to create perfectly decentralized markets, a growing number of crypto funds are entering the
ICO market and reintroducing a substantial degree of intermediation. This development fuels the
conjecture that DeFi is relatively inefficient and intermediation is inevitable in nascent markets with
highly asymmetric information (Zetzsche et al., 2020). Indeed, reduced-form instrumental variable
analyses suggest that search frictions are pronounced in non-intermediated ICOs, and crypto funds
help reduce these frictions and extract economic rents for this service. Specifically, intermediated
ICOs are able to achieve their crowdfunding goals 25% faster than non-intermediated ICOs, and
crypto funds may charge a discount of up to 57% on token value for their intermediation services.
Furthermore, we propose and structurally estimate a simple model of the ICO market. The evi-
dence implied by the model suggests that, relative to a perfectly efficient market (the “Walrasian
equilibrium”), the ICO market is 52% efficient, with search-related costs accounting for the wel-
fare loss of 48%. Intermediaries are well aware of their salient function and appropriate most of
the transaction surplus in intermediated ICOs. Overall, both reduced-form evidence and structural
estimation support the DIH and IEH. Efficient DeFi markets for startups require a certain degree of
intermediation in the absence of an efficient mechanism that matches entrepreneurs and investors
directly.

8.2 Theoretical Contributions and Practical Implications

This study contributes to the growing literature on DeFi markets for startups, in particular ICOs,
as well as to the nascent literature on crypto funds. The first contribution pertains to the market
design of DeFi markets for startups. While a growing literature examines startup firm-level deter-
minants of ICO success (e.g., Adhami et al., 2018; An et al., 2019; Belitski and Boreiko, 2021;
Bellavitis et al., 2020; Bellavitis et al., 2021; Bellavitis et al., 2022; Benedetti and Kostovetsky,
2021; Campino et al., 2021, 2022; Colombo et al., 2021; Fisch, 2019; Fisch and Momtaz, 2020;
Giudici and Adhami, 2019; Hornuf et al., 2021; Huang et al., 2020; Momtaz, 2021a, 2021d), the
present study shows that ICOs may not be perfectly efficient for reasons that startups cannot di-
rectly influence, and that are rather systematically grounded in the ICO market’s microstructure.
With the results indicating that the ICO market realizes only half of its welfare potential, with the
other half being lost to search-related market frictions, the study contributes to several strands in
the entrepreneurial finance literature that build implicitly on search. One example is the growing
literature on signaling in ICOs (e.g., An et al., 2019; Belitski and Boreiko, 2021; Bellavitis et al.,
2020; Bellavitis et al., 2022; Campino et al., 2021; Fisch, 2019; Giudici and Adhami, 2019; Lee
et al., 2022), as well as adjacent arguments, such as moral hazard in signaling (e.g., Momtaz,
2021d) or fraud (Hornuf et al., 2021). These studies implicitly assume that search frictions are
an important reason as to why signaling is a key ICO success determinant, but they never make
search frictions explicit. Overall, this paper builds on these prior works, and estimates the aggre-
gate efficiency of an entrepreneurial finance market, as well as the efficiency loss attributable to
search-related market frictions. As such, the paper contributes to the literature on the optimal
design of entrepreneurial finance markets.

33
 A second contribution pertains to the very nascent literature on DeFi intermediation through
crypto funds. There are now more than 800 crypto funds active, with aggregate assets under
management of around $60 billion.13 Crypto funds may increase the efficiency of startup mar-
kets, inter alia, by introducing sophisticated trading strategies to otherwise illiquid entrepreneurial
finance markets and through economies of scale associated with search-related human capital in-
vestments (Mokhtarian and Lindgren, 2018). Yet, this new intermediary is relatively understudied.
Fisch and Momtaz (2020) find that institutional investors’ involvement in token offerings certifies a
startup’s quality and thus increase token valuation and post-offering performance. Momtaz (2021c)
examines a novel dataset with monthly performance data for crypto funds, and finds that they out-
perform the market and perform some risk management function for their investors when token
markets experience a downturn. A theoretical paper by Wang et al. (2021b) establishes that crypto
funds may increase token value and that they are able to identify high-quality startups and transact
privately. To our knowledge, we are the first to examine how crypto funds impact search frictions,
equilibrium asset allocations and prices, and welfare overall. In particular, this study contributes to
the emerging literature on DeFi intermediation (for seminal arguments, see Boreiko and Vidusso,
2019, though on the different intermediation channel of ICO aggregator platforms) by showing
that crypto funds improve ICO market efficiency by reducing delays in achieving crowdfunding
goals, and plausibly reducing overinvestment in adversely selected low-quality projects as well as
underinvestment by asymmetrically informed investors in high-quality projects.
The study has important practical implications for entrepreneurs, investors, and policymakers.
Entrepreneurs face a difficult trade-off when choosing between intermediated and non-intermediated
ICOs. Intermediated ICOs improve the crowdfunding outcome, but they also impose significant
costs associated, inter alia, with unfavorable rent sharing with intermediaries. At the margins, en-
trepreneurs with a relatively large platform user base are likely better off with non-intermediated
ICOs, while entrepreneurs with smaller platform user base will benefit from ICO intermediation.
For individual investors, their search abilities will determine whether they should invest in inter-
mediated or non-intermediated ICOs. DeFi intermediaries, specifically crypto funds, profit from
favorable rent sharing. Given that the DeFi revolution arguably reallocates centralization in finan-
cial markets to other parts of the value chain (Zetzsche et al., 2020), the most successful DeFi
intermediaries will play important roles in the future of entrepreneurial finance. The implications
for policymakers are intricate. While DeFi intermediaries remedy several structural problems in
the ICO market, such as manifestations of moral hazard (Momtaz, 2021d) or fraud (Hornuf et al.,
2021), they may create a number of new problems. In particular, crypto funds trade in tokens,
which are classified as “non-securities” (Mokhtarian and Lindgren, 2018), which, in turn, exempt
crypto funds from most financial market regulations. This enables new trading strategies in en-
trepreneurial finance markets, such as short selling, with possibly highly detrimental consequences
for tokenized startup firms.
13
See https://cryptofundresearch.com/q1-2021-crypto-fund-report/.

34
8.3 Limitations and Avenues for Future Research

This study represents an initial step toward quantifying the aggregate efficiency of DeFi markets
for startups, with a focus on how market frictions impact token allocations, prices, and overall
welfare. Given the soaring interest among entrepreneurs and investors in various DeFi markets
that extend beyond the ICO market, as well as the growing body of research (for excellent reviews,
see Brochado and Troilo, 2021; Kher et al., 2021), it is likely that a broad research program will
evolve around these themes. Below, we suggest potential avenues for future research.
Sources of welfare losses. This study has quantified the aggregate efficiency of DeFi markets for
startups, and finds that market frictions reduce the realized welfare in the ICO market by 48%
relative to the Walrasian equilibrium. However, the study does not disentangle the precise sources
of the efficiency losses. Several related studies show that frictions include, inter alia, adverse selec-
tion or outright fraud (Hornuf et al., 2021), poor governance (Giudici et al., 2020), moral hazard
(Momtaz, 2021d), geographic frictions (Huang et al., 2020), and regulatory frictions (Bellavitis et
al., 2021). Yet, the relative importance of these frictions for welfare losses in the ICO market is not
clear, which prevents targeted policy interventions. Similarly, there is little evidence as to the types
of frictions that entrepreneurs can mitigate themselves, e.g., via signaling (Fisch, 2019), vis-à-vis
frictions that need to be addressed systematically by regulators and policymakers (Zetzsche et al.,
2020; Zetzsche et al., 2017). Therefore, a potentially fruitful avenue for future research involves
evaluations of policy interventions in the ICO market (for an overview, see Bellavitis et al., 2021),
and their impact on entrepreneurs and aggregate market efficiency.
Heterogeneity across entrepreneurs, investors, and intermediaries. DeFi market frictions and effi-
ciency are largely unobservable, which is the reason why we have to rely on a model. Every model
necessarily abstracts from reality and makes simplifying assumptions to be analytically tractable or
facilitate structural estimation. For example, the present model assumes that there are only two
types of token holders that purchase tokens from entrepreneurs: individual investors and interme-
diaries. Yet, these two investor categories are heterogeneous. For instance, crypto funds employ
different investment strategies, ranging from venture-style funds to quantitative hedge funds. How
these strategies influence their role as intermediaries is unexplored in this paper, but seems in-
teresting for future research. Similarly, there are various types of intermediation, e.g., platforms
that promote ICOs (Boreiko and Vidusso, 2019), exchanges that conduct Initial Exchange Offer-
ings (IEOs), VCs that invest in equity-token bundles (Fisch and Momtaz, 2020), and many others.
Similarly, not only investors and intermediaries, but also entrepreneurs, are heterogeneous. Our
model regards entrepreneurs as such with respect to their platform’s underlying user base. How-
ever, Adhami et al. (2018), Bellavitis et al. (2021), Fisch (2019), Huang et al. (2020), Mansouri
and Momtaz (2021), and Momtaz (2020b), among many others, report that token-issuing startup
firms differ substantially in terms of their size, human capital stock, and business model. Therefore,
it seems interesting to further investigate the startup firm characteristics that make intermediation
more or less attractive for entrepreneurs.
Comparisons across crowdfunding models. There is relatively little comparative work on the

35
aggregate efficiency of the various crowdfunding markets. However, crowdfunding markets are in-
herently different (e.g., see Lambert, 2022, for a comparison of equity-, lending-, and reward-based
models). While many market design problems are shared among crowdfunding markets (e.g., the
inherent problem of fraud, see Cumming et al., 2021; Hornuf et al., 2021), other institutional
features, such as investor motivations (Fisch et al., 2021) and the market-microstructure (Cum-
ming and Vismara, 2017), are dramatically different. For example, in the ICO context, token-based
crowdfunding improves upon other crowdfunding models with regard to transactional efficiency
thanks to blockchain technology, whereas the increased granularity of token-based crowdfunding
markets due in large part to fractional ownership and lower entry barriers may put the ICO market
at a relative disadvantage in terms of search-related efficiency. These comparative trade-offs lead
to the fundamental question of the “socially optimal” crowdfunding model, that is, whether there is
a single crowdfunding market that is superior to others in terms of the welfare it creates for society.

8.4 Concluding Remarks

This paper has shown that Decentralized Finance (DeFi) markets for startups, in particular the Ini-
tial Coin Offering (ICO) market, are relatively inefficient. Relative to the Walrasian equilibrium,
in which only the highest-value investors purchase tokens at fair prices from entrepreneurs in fric-
tionless markets, the ICO market is 52% efficient due to pronounced search frictions. As such,
this paper provides an explanation for the emergence of DeFi intermediaries, in particular crypto
funds, that are able to reduce search frictions and extract substantial economic rents for this ser-
vice. The results have important implications for the design of token-based crowdfunding markets.
DeFi involves a trade-off between transactional efficiency and search-related inefficiency. Overall,
without an efficient matching mechanism for entrepreneurs and investors, the results suggest that
perfectly disintermediated entrepreneurial finance markets are inefficient and a certain degree of
intermediation is likely to persist.

36
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Exhibits

43
 Figure 1: Evolution of the ICO Market

5500

5000

4500

4000

3500
# ICOs

3000

2500

2000

1500

1000

500

2017 2018 2019 2020 2021

Figure 2: Evolution of Intermediation in the ICO Market

350

300

250
# Intermediated ICO

200

150

100

50

2017 2018 2019 2020

44
 Table 1: Summary Statistics for Cross-Sectional Sample — ICOs, 2017-2020

Sample (# obs. = 567) ∆ to TORD-Population

Mean SD Q1 Median Q3 ∆ Mean ∆ Median
Key variables:
Intermediated 0.085 0.279 0 0 0 0.023* 0
ICO duration to achieve funding goal, in days (log.) 3.799 1.090 3.401 4.007 4.522 0.110** 0.294***
Valuation, in $ mil. 9.253 27.448 1.054 3.500 10.192 −2.727* −0.286
ICO-related characteristics:
Ethereum 0.891 0.312 1 1 1 0.019 0
Pre-sale 0.737 0.441 0 1 1 0.244*** 1***
# competing offerings 947 439 664 875 1,175 176.46*** 152***
KYC process 0.783 0.413 1 1 1 0.367*** 1***
Hard cap, in $ mil. 139 978 9 19 32 −76 −1
Soft cap in % of hard cap 0.43 7.17 0.07 0.15 0.27 −0.429*** −0.15***
Whitelist 0.99 0.00 1 1 1 0.57*** 1***
45

Team-related characteristics:
Expert rating 3.641 0.538 3.300 3.700 4.000 0.720*** 0.800***
# team members 15.2 7.5 10 15 19 4.5*** 6***
% team with technical degree 0.023 0.050 0.008 0.014 0.025 −0.231*** −0.216***
% team with crypto experience 0.039 0.084 0.014 0.023 0.040 −0.318*** −0.311***
% team with Ph.D. 0.004 0.008 0 0 0.004 −0.045*** 0
 Table 2: Summary Statistics for Longitudinal Sample — ICO Market Dynamics, 2017-2020

Mean SD Q1 Median Q3

Panel A: Quantity Panel of ICO Market Activity per Month (# monthly obs. = 10,470)
ICO firms’ platform size, in # users 28,431 136,751 1,034 1,388 9,366
Active ICOs 360 161 240 359 520
Completed non-intermediated ICOs 348 154 237 357 513
Completed intermediated ICOs 12.2 9.6 2 14 21
Intermediaries’ cumulative token inventory 248 91 190 283 320

Panel B: Price Panel (# completed ICOs = 1,922)

Token prices in non-intermediated ICOs 12.98 21.35 1.00 4.00 15.00
Token prices in intermediated ICOs 6.22 12.85 0.43 1.71 6.41
ICO firms’ platform size, in # users 8,334 26,278 774 2,788 7,569

46
Table 3: Two-Stage Analysis of Search Frictions in Intermediated vs. Non-Intermediated ICOs

Stage: 1st 1st 2nd 2nd

Model: Selection Control GR IV
Dependent variable: 1Intermediated Duration Duration Duration
Key variable:
1Intermediated −0.273*** −0.273*** −0.287***
(0.076) (0.077) (0.079)
ICO-related controls:
Ethereum 0.030 −0.032 −0.032 −0.032
(0.041) (0.069) (0.069) (0.069)
Pre-sale −0.013 0.090* 0.090* 0.090*
(0.030) (0.050) (0.050) (0.050)
# competing offerings (log.) −0.098** 2.616*** 2.616*** 2.615***
(0.039) (0.066) (0.066) (0.066)
Soft cap, in $ mil. (log.) −0.001 −0.268*** −0.268*** −0.268***
(0.041) (0.068) (0.068) (0.068)
Hard cap, in $ mil. (log.) −0.006 0.007 0.007 0.007
(0.009) (0.015) (0.015) (0.015)
Whitelist 0.036 −0.038 −0.038 −0.038
(0.026) (0.044) (0.044) (0.044)
KYC −0.007 −0.027 −0.027 −0.027
(0.033) (0.054) (0.054) (0.054)
Team-related controls:
Expert rating 0.023 −0.015 −0.015 −0.014
(0.026) (0.043) (0.043) (0.043)
# team members 0.001 −0.001 −0.001 −0.001
(0.002) (0.003) (0.003) (0.003)
% team with technical degree 0.207*** −0.154 −0.154 −0.151
(0.078) (0.130) (0.131) (0.130)
% team with rypto experience 0.008 0.042 0.042 0.042
(0.064) (0.106) (0.106) (0.106)
% team with Ph.D. 0.348* −0.784*** −0.784*** −0.779***
(0.177) (0.295) (0.297) (0.296)
Population weights ✓ ✓ ✓ ✓
Generalized Residuals ✗ ✗ ✓ ✗
Instrumental Variable ✗ ✗ ✗ ✓
Country fixed effects ✓ ✓ ✓ ✓
Quarter-year fixed effects ✓ ✓ ✓ ✓
# Obs. 567 567 567 566
Adjusted R2 0.018 0.823 0.823 0.823

47
Table 4: Two-Stage Analysis of Valuation Discount in Non-Intermediated ICOs

Stage: 1st 1st 2nd 2nd

Model: Selection Control GR IV
Dependent variable: 1Not intermediated Valuation Valuation Valuation
Key variable:
1Not intermediated −0.793*** −0.850*** −0.861***
(0.262) (0.262) (0.274)
ICO-related controls:
Ethereum −0.030 −0.031 −0.011 −0.033
(0.041) (0.236) (0.236) (0.237)
Pre-sale 0.013 −0.207 −0.250 −0.206
(0.030) (0.172) (0.173) (0.172)
# competing offerings (log.) 0.098** −0.293 −0.278 −0.287
(0.039) (0.226) (0.225) (0.227)
Soft cap, in $ mil. (log.) 0.001 0.561** 0.571** 0.562**
(0.041) (0.233) (0.232) (0.233)
Hard cap, in $ mil. (log.) 0.006 0.431*** 0.439*** 0.432***
(0.009) (0.051) (0.051) (0.051)
Whitelist −0.036 0.253* 0.268* 0.250*
(0.026) (0.150) (0.150) (0.151)
KYC 0.007 −0.083 −0.068 −0.082
(0.033) (0.187) (0.187) (0.188)
Team-related controls:
Expert rating −0.023 0.347** 0.348** 0.345**
(0.026) (0.149) (0.148) (0.149)
# team members −0.001 0.038*** 0.036*** 0.038***
(0.002) (0.010) (0.010) (0.010)
% team with technical degree −0.207*** −1.533*** −1.663*** −1.547***
(0.078) (0.448) (0.450) (0.448)
% team with crypto experience −0.008 0.970*** 0.993*** 0.970***
(0.064) (0.365) (0.364) (0.366)
% team with Ph.D. −0.348* 1.242 1.420 1.218
(0.177) (1.018) (1.018) (1.019)
Population weights ✓ ✓ ✓ ✓
Generalized Residuals ✗ ✗ ✓(-**) ✗
Instrumental Variable ✗ ✗ ✗ ✓
Country fixed effects ✓ ✓ ✓ ✓
Quarter-year fixed effects ✓ ✓ ✓ ✓
# Obs. 567 567 567 566
Adjusted R2 0.018 0.264 0.269 0.262

48
Figure 3: Token Prices by Platform Size for Individual Investors and Intermediaries

70
Prices for individuals
Prices for intermediaries
Aggregate platform token prices (in $ million)

60

50

40

30

20

10

Largest 10 20 30 40 50 60 70 80 90 Smallest
Platform size percentile

49
 Table 5: Model-Implied ICO Market Parameters: Search, Valuation, and Rent Sharing

Parameter Notation Estimate

(SE)
Intensity of drops in ICO valuations λ 0.0624

Contact rates in non-intermediated ICOs γs 0.2169

Contact rates in intermediated ICOs: Individuals meet inter- γsd 0.2537

mediaries

Contact rates in intermediated ICOs: Intermediaries meet αds 0.7099

individuals

Platform size-related depreciation rate of ICO valuation δ2 0.0165

Buyer valuation zh 7.0442e+5

Seller valuation zl 5.4677e+4

Flow search costs cs 2.3124e+4

Surplus sharing between buying and selling individuals θs 0.3520

Surplus sharing between individuals and intermediaries θd 0.9452

50
Table 6: Model Fit: Aggregate Quantity-Related ICO Market Moments, Empirical vs. Simulated

Empirical Empirical Theoretical Simulated

Moment Value Moment Value
R a∗l R a∗
Active ICOs

µlo (a)da+ 0 do µdo (a)da
E Cumulative ICOs 0.1507 0
A 0.1497
  R a∗do
Cumulative intermediated ICOs µdo (a)da
E Cumulative ICOs 0.1039 0
A 0.1038
  R a∗l
Active non-intermediated ICOs γS 0 µlo (a)da
E Cumulative ICOs 0.1456 A 0.1447
  R a∗do
Active intermediated ICOs αds 0 µdo (a)da
E Cumulative ICOs 0.0051 A 0.0050
R a∗l R a∗do
0 aµlo (a)da+ 0 aµdo (a)da
E (Platform size, Active ICOs) 50.00 R al ∗ R a∗do 50.17
0 µ lo (a)da+ 0 µdo (a)da

Average absolute percentage deviation = 0.6%

51
 Table 7: ICO Market’s Model-Implied Market Efficiency and Frictions

Walrasian Efficiency 100%

Actual Efficiency 52.4%

Search-related Inefficiency (∆ Walrasian – Actual) 48.6%

52

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