Financial technology (FinTech) is promising to revolutionize the finance world. A key element in this vision is decentralization, aiming to break the market power of financial intermediaries and other large players in the financial industry. However, while FinTech focuses on increasing competition, the rise of technology in the economy at large is generating concerns of greater concentration of market power. Technology firms, such as Amazon, Meta, Uber, and AirBnB, control and operate online platforms with a large network of users, often buyers and sellers of goods and services.

These platforms may bring efficiency gains—a single ride-sharing platform can better optimize ride scheduling and minimize wait times. Yet, concerns remain that a single operator would be tempted to behave like a monopolist, setting high prices or fees, when customers have no other place to go. 

We show that a variant of a recent technological innovation—“utility tokens” on a blockchain—can offer a way to preserve the efficiency benefits of large-scale platforms while also limiting monopolistic behaviour. The key insight is that introducing tokens to a platform, under certain design principles, acts as a commitment device for fair competition in the long run.

Preserving Efficiency without Letting One Firm Rule

Modern online platforms are often natural monopolies due to inherent network effects: a platform can enhance the quality of its service if more users join it. In turn, these benefits make it attractive for users to join the same platform. However, a platform owner who knows that consumers prefer to be on the same platform might be tempted to charge high prices to the captive base. Hence, we face a dilemma: efficiency could increase if everyone is on the same platform, but it could decrease due to uncompetitive prices.

The Role of Utility Tokens

Utility tokens on a blockchain can offer a potential solution. These tokens, distinct from cryptocurrencies like Bitcoin, serve as the exclusive means of payment for a service on a particular platform. For example, the Filecoin token is the utility token associated with the Filecoin platform, a blockchain-based interface that allows users who need additional data storage to rent it using Filecoin tokens from users who have excess storage on their devices. One Filecoin token, for instance, might buy one unit of data storage on the Filecoin network.

How can utility tokens help make prices more competitive while keeping all users on a single platform? The key idea is that a platform introduces tokens to facilitate direct transactions between users on the platform. Instead of having to make cash payments to the platform owner for each transaction, users can exchange services directly with each other through tokens. Importantly, consumers and providers of a service can also trade these tokens among themselves in an open market and not only through the platform owner. Disintermediating the platform in this way reduces its pricing power and brings about competition in the long run.

The utility tokens in our model are similar in some respects to those used by platforms like Filecoin. However, an important insight of our analysis is that a few key features are critical for utility tokens to serve the purpose of commitment to competition. While these key features can be found across different tokens, they have not been consistently adopted together. 

The first and foremost feature is the presence of a market in which service providers and consumers can trade the tokens. In addition, there are three other critical features. Two of them guarantee that the token is the only means of payment on the platform: the owner cannot charge consumers or providers any fees for accessing or using the platform, and, other than the transfer of tokens, there cannot be any additional transfer between consumers and providers during goods or service exchange. The last critical feature is that the service price is fixed in token units. This feature implies that each time the owner sells a token (or equivalently, a certain number of service units), it also sells the right to resell that same number of service units in the future. Thus, tokens introduce durability in the trade of the nondurable service and, importantly, the real value of tokens does not depreciate over time.

With these features, the disintermediation of the platform works as follows. Early on, the platform owner owns all tokens, giving them full control over how many tokens to sell and allowing them to charge high prices. When providers deliver services, they receive tokens from consumers. To convert these tokens into a cash payment, providers resell them in the common token market. The platform owner then faces competition in the token market both from consumers and from providers. On the one hand, consumers want to buy tokens, bidding up their price and making it hard for the owner to regain control of tokens. On the other hand, service providers want to sell tokens, bidding down their price and limiting the owner’s revenue from new token sales. We show that this mechanism leads to a gradual erosion of monopoly power. As the platform owner sells more and more tokens to generate profits, the number of tokens in circulation increases. However, these tokens never return to the owner and are resold by other parties, which creates even more competition for the platform owner in the token market. As a result, the prices on the platform become more competitive over time.

Our conclusion that the durability of tokens leads to the competitive price over time is reminiscent of a classic result conjectured by Coase (1972) for durable-goods monopolies. Coase (1972) argues that the pricing power of such a monopolist is limited because consumers wait to buy a durable good if they anticipate future price declines. In effect, the monopolist faces self-competition with their own future sales, which limits their market power. In our model, the monopolist loses market power by competing with past token sales. This feature of our model is similar to competition that a durable-goods monopolist faces from a secondary market for used goods. An important difference is that the service purchased with tokens is nondurable and consumers have to spend tokens to obtain it.

When Would a Firm Embrace This System?

If tokenization undermines the ability to operate as a monopoly, why would a large platform operator voluntarily adopt it? In some cases, it is precisely because the operator expects competition from new rivals. If other platforms threaten to enter the market, incumbents might lock in user loyalty by issuing tokens that guarantee fair prices in the future. Tokenizing a platform is a commitment to customers that “prices will not skyrocket once you are locked in.” For this to work, it is important that consumers anticipate continued demand for the service in the future and therefore value the future decline in prices. Likewise, a new entrant can use utility tokens to stand out in a market dominated by an incumbent. Over time, tokenization can benefit users more than competition from separate platforms because it ensures wide participation of users, who otherwise would be priced out, which is valuable if platforms feature network effects.

Why, in practice, has the adoption of utility tokens been limited so far? Many platforms that issued utility tokens, such as Filecoin, appear to have the same motivation as in our analysis—decentralizing and sharing surplus with users. While the key features we identify exist in various forms in practice, they have not been consistently adopted together. As is often the case with new markets, it is natural that convergence to the optimal features requires time for experimentation and innovation. In the case of utility tokens, the token sale market collapsed, perhaps prematurely, in 2019 following many cases of fraud and regulatory concerns. Given the potential benefits, our paper provides a framework under which this innovation can be revived by, for example, introducing a special regulatory regime tailored for the issuance of utility tokens.

Potential Implications for Regulators

If platforms do not have incentives to tokenize organically, regulation can help improve online marketplaces by requiring tokenization. Essentially, tokens are a tractable tool to bring competition. Regulators can rely on it instead of other less desirable tools. For example, there has been an increased congressional focus on how best to regulate the monopolies of firms such as Meta, Twitter, and Amazon. Some policy proposals recommend breaking up these companies. However, this may be inefficient due to network effects as users benefit from many other users being on the same platform.

By requiring that platforms use utility tokens as their means of payment, no single entity can unilaterally hike prices over time. Over time, token-based competition emerges even if the platform remains under a single technical operator. There is a big if here, of course: the design must be locked in from the start so that the operator cannot renege on the arrangement. Some might worry that full decentralization is too chaotic, or that it requires giving up control to thousands of anonymous token holders. But our theory suggests that not every aspect needs to be decentralized—we identify four required platform design features that ensure long-run competitive prices. Therefore, a robust legal or regulatory framework only needs to ensure that the platform’s code containing these four features remains in place or is changeable only with broad user consent. Other operations, like interface design or marketing, can stay under a central firm’s control if desired.

The Big Picture

Platforms in the digital economy can create enormous value but also lead to concerns over their market power. Utility tokens, when designed with the right features, can make prices competitive over time, while preserving efficiency gains from having users on a single platform. This approach stands out as an alternative to forcibly breaking up large platforms or relying heavily on uncertain future entrants to restore competition.

While this is no silver bullet—real-world implementation requires thoughtful regulation and acceptance from users—it is a new, distinctive option for policymakers and the public to consider. In a world where technology continues to evolve, it is worth exploring how such token-based platforms might help balance innovation, efficiency, and open competition.