A currency's essential feature is to be a medium of exchange. We leverage a quasi-natural experiment-El Salvador as the rst country to make bitcoin legal tender-to study a cryptocurrency's potential to be used in daily transactions. The government also launched and provided incentives to download and use a digital wallet named Chivo, which shares features with Central Bank Digital Currencies (CBDCs) and allows users to trade bitcoin and dollars. Were Chivo Wallet and bitcoin actually adopted after this "big push"? Conducting a representative face-to-face survey and relying on blockchain data to obtain all Chivo transactions, we document how usage of digital payments and bitcoin is low, concentrated, and has been decreasing over time. We nd that privacy concerns are key barriers to adoption, which speaks to a policy debate on crypto and CBDCs that has had anonymity at its core. We also estimate the technology's adoption cost and its network externalities.
Cryptocurrencies often tend to maintain a publically accessible ledger of all transactions. This open nature of the transactional ledger allows us to gain macroeconomic insight into the USD 1 Trillion crypto economy. In this paper, we explore the free market-based economy of eight major cryptocurrencies: Bitcoin, Ethereum, Bitcoin Cash, Dash, Litecoin, ZCash, Dogecoin, and Ethereum Classic. We specifically focus on the aspect of wealth distribution within these cryptocurrencies as understanding wealth concentration allows us to highlight potential information security implications associated with wealth concentration. We also draw a parallel between the crypto economies and real-world economies. To adequately address these two points, we devise a generic econometric analysis schema for cryptocurrencies. Through this schema, we report on two primary econometric measures: Gini value and Nakamoto Index which report on wealth inequality and 51% wealth concentration respectively. Our analysis reports that, despite the heavy emphasis on decentralization in cryptocurrencies, the wealth distribution remains in-line with the real-world economies, with the exception of Dash. We also report that 3 of the observed cryptocurrencies (Dogecoin, ZCash, and Ethereum Classic) violate the honest majority assumption with less than 100 participants controlling over 51% wealth in the ecosystem, potentially indicating a security threat. This suggests that the free-market fundamentalism doctrine may be inadequate in countering wealth inequality within a crypto-economic context: Algorithmically driven free-market implementation of these cryptocurrencies may eventually lead to wealth inequality similar to those observed in real-world economies.
Decentralized Finance (DeFi) is a popular topic in the blockchain and cryptocurrency industry in the early 2020s. Still, cryptocurrencies have not yet become Decentralized Payment Systems (DPS) because of the high volatility of bitcoin and many of the altcoins. We investigated a proposed method to form a non-collateralized stablecoin called the Morini's Scheme of Inv&Sav wallets. We figured out two equations for the rebasement for the Inv wallet balances and then compared the results. We found the second rebasement method to be fairer to the agents, but we found the issue of negative balances with both methods. We proposed novel solutions to overcome these issues. One of the proposed solutions was to freeze some money in the Sav wallet if there is a negative balance in the Inv wallet. Another proposed solution was to introduce a two-money economy of money and antimoney to turn the current centralized token distribution model decentralized and make transactions more probable even if agents do not have enough money funds; this could be seen as a decentralized version of credit cards.
We review different classes of cryptocurrencies with emphasis on their economic properties. Pure-asset coins such as Bitcoin, Ethereum and Ripple are characterized by not being a liability of any economic agent and most resemble commodities such as gold. Central bank digital currencies, at the other end of the economic spectrum, are liabilities of a Central Bank and most resemble cash. In between, there exist a range of so-called stable coins, with varying degrees of economic complexity. We use balance sheet operations to highlight the properties of each class of cryptocurrency and their potential uses. In addition, we propose the basic structure for a macroeconomic model incorporating all the different types of cryptocurrencies under consideration.
In this paper, we construct a decentralized clearing mechanism which endogenously and automatically provides a claims resolution procedure. This mechanism can be used to clear a network of obligations through blockchain. In particular, we investigate default contagion in a network of smart contracts cleared through blockchain. In so doing, we provide an algorithm which constructs the blockchain so as to guarantee the payments can be verified and the miners earn a fee. We, additionally, consider the special case in which the blocks have unbounded capacity to provide a simple equilibrium clearing condition for the terminal net worths; existence and uniqueness are proven for this system. Finally, we consider the optimal bidding strategies for each firm in the network so that all firms are utility maximizers with respect to their terminal wealths. We first look for a mixed Nash equilibrium bidding strategies, and then also consider Pareto optimal bidding strategies. The implications of these strategies, and more broadly blockchain, on systemic risk are considered.
We build an endogenous growth model with consumer-generated data as a new key factor for knowledge accumulation. Consumers balance between providing data for profit and potential privacy infringement. Intermediate good producers use data to innovate and contribute to the final good production, which fuels economic growth. Data are dynamically nonrival with flexible ownership while their production is endogenous and policy-dependent. Although a decentralized economy can grow at the same rate (but are at different levels) as the social optimum on the Balanced Growth Path, the R&D sector underemploys labor and overuses data—an inefficiency mitigated by subsidizing innovators instead of direct data regulation. As a data economy emerges and matures, consumers’ data provision endogenously declines after a transitional acceleration, allaying long-run privacy concerns but portending initial growth traps that call for interventions. This paper was accepted by Kay Giesecke, finance.
In this review, we evaluate the mechanisms behind the decentralized finance\nprotocols for generating stable, passive income. Currently, such savings\ninterest rates can be as high as 20% annually, payable in traditional currency\nvalues such as US dollars. Therefore, one can benefit from the growth of the\ncryptocurrency markets, with minimal exposure to their volatility risks. We aim\nto explain the rationale behind these savings products in simple terms. The key\nto this puzzle is that asset deposits in cryptocurrency ecosystems are of\nintrinsic economic value, as they facilitate network consensus mechanisms and\nautomated marketplaces (e.g. for lending). These functions create wealth for\nthe participants, and they provide unique advantages unavailable in traditional\nfinancial systems. Our review speaks to the notion of decentralized basic\nincome - analogous to universal basic income but guaranteed by financial\nproducts on blockchains instead of public policies. We will go through their\nimplementations of how savings can be channeled into the staking deposits in\nProof-of-Stake (PoS) protocols, through fixed-rate lending protocols and\nstaking derivative tokens, thereby exposing savers with minimal risks. We will\ndiscuss potential pitfalls, assess how these protocols may behave in market\ncycles, as well as suggest areas for further research and development.\n
Ali Raheman, Anton Kolonin, Ben Goertzel, Gergely Hegykozi · 5 authors
We present the cognitive architecture of an autonomous agent for active portfolio management in decentralized finance, involving activities such as asset selection, portfolio balancing, liquidity provision, and trading. Partial implementation of the architecture is provided and supplied with preliminary results and conclusions.
The paper explores the role, evolution and ruling principles of the concept of “money” in the 21st Century. In this continuously evolving context, cryptocurrencies and Blockchain technology are widely considered the most relevant monetary innovations of the last decades. By means of a macro-founded logical-analytical approach combined with statistical evidence, the paper provides arguments: 1. dismissing the “innovation myth” behind cryptocurrencies because of de facto representing a comeback of the private issue of means of payments and, more problematically, seigniorage at its best; 2. confirming that crypto-tokens do not comply with basic, still ruling monetary principles; 3. suggesting that excess liquidity is already invested in crypto-markets (which are themselves “inflationary”, namely not backed by real value (i.e. GDP). The concrete risk is, once again in economic history, represented by facing a financial bubble.
Carlos Eduardo Carvalho, Desirée Almeida Pires, Marcel Artioli, Giuliano Contento de Oliveira
Abstract This paper analyses the impacts of the innovation known as distributed ledger technology (DLT) on the monetary system and on financial activities. Private cryptocurrencies, such as Bitcoin, are permissionless means of payment, based on blockchain, a form of DLT. Evaluations suggested that these private cryptocurrencies could compete with the banks payment systems and even supplant state currency. The development of these technologies has the potential to modify profoundly monetary and financial practices, but there are no indications that they may threaten the centrality of state money and the banking system in the contemporary monetary order. Major international banks have developed cryptocurrencies for settlement systems and for interbank transactions, including the so-called stablecoins, issued by highly technological companies with on par conversion into state money. Some central banks are studying the launch of state cryptocurrencies that could coexist with their fiduciary state currency and even replace their paper currency. The use of this technology results in new challenges for regulation, including the fact that cryptocurrencies can be used for money laundering and by organized crime.
This discussion applies quantitative finance methods and economic arguments to cryptocurrencies in general and bitcoin in particular -- as there are about $10,000$ cryptocurrencies, we focus (unless otherwise specified) on the most discussed crypto of those that claim to hew to the original protocol (Nakamoto 2009) and the one with, by far, the largest market capitalization. In its current version, in spite of the hype, bitcoin failed to satisfy the notion of "currency without government" (it proved to not even be a currency at all), can be neither a short nor long term store of value (its expected value is no higher than $0$), cannot operate as a reliable inflation hedge, and, worst of all, does not constitute, not even remotely, a safe haven for one's investments, a shield against government tyranny, or a tail protection vehicle for catastrophic episodes. Furthermore, bitcoin promoters appear to conflate the success of a payment mechanism (as a decentralized mode of exchange), which so far has failed, with the speculative variations in the price of a zero-sum maximally fragile asset with massive negative externalities. Going through monetary history, we show how a true numeraire must be one of minimum variance with respect to an arbitrary basket of goods and services, how gold and silver lost their inflation hedge status during the Hunt brothers squeeze in the late 1970s and what would be required from a true inflation hedged store of value.
Bitcoin got increasing popularity and was considered by the public as a great investment due to huge overvaluation in 2017. In parallel, economists and high-level technicians started to advocate the use of bitcoin and other cryptographic currencies as an alternative to national currencies. However, bitcoin is far from being considered as money, so it is hard for a monetary and payment system to emerge based on these technologies. This paper, apart from briefly presenting the Bitcoin System, shows why bitcoin is not money in the light of the Keynesian theory. We use Keynesian essential properties of Money and Modern Money Theory to define money, and to show that cryptographic currencies are not money. We then go back to Keynes' theory of portfolio choice, established in Chapter 17 of the General Theory, to show what bitcoin really is: at most, bitcoin is a perfect virtual commodity, a virtual liquid speculative asset.
In recent years blockchain consensus mechanisms based on Proof of Stake gained increasing attention as an alternative to Proof of Work, which requires high energy consumption. In its original version Proof of Stake hinges on the idea that, for a user, the likelihood to confirm the next block is positively related to the amount of currency units held in the wallet, and possibly also on the time length which the money has been unspent for. In a simple framework with risk neutral users we provide some early insights on the monetary equilibrium of Proof of Stake based platforms. In particular, we find that the aggregate demand and supply of currency may not coincide, which implies that users could hold suboptimal quantities of the currency. Furthermore, we also discuss how symmetric stationary states of the system could be implausible. As a consequence, a long run uniform distribution of money would seem unlikely unless appropriate measures are introduced.
Ye Wang, Yan Chen, Haotian Wu, Liyi Zhou · 6 authors
Decentralized Exchanges (DEXes) enable users to create markets for exchanging any pair of cryptocurrencies. The direct exchange rate of two tokens may not match the cross-exchange rate in the market, and such price discrepancies open up arbitrage possibilities with trading through different cryptocurrencies cyclically. In this paper, we conduct a systematic investigation on cyclic arbitrages in DEXes. We propose a theoretical framework for studying cyclic arbitrage. With our framework, we analyze the profitability conditions and optimal trading strategies of cyclic transactions. We further examine exploitable arbitrage opportunities and the market size of cyclic arbitrages with transaction-level data of Uniswap V2. We find that traders have executed 292,606 cyclic arbitrages over eleven months and exploited more than 138 million USD in revenue. However, the revenue of the most profitable unexploited opportunity is persistently higher than 1 ETH (4,000 USD), which indicates that DEX markets may not be efficient enough. By analyzing how traders implement cyclic arbitrages, we find that traders can utilize smart contracts to issue atomic transactions and the atomic implementations could mitigate users' financial loss in cyclic arbitrage from the price impact.
From 1680-1980 paper currency gained popularity and is used across the world that is how modern currency came into existence. Modern currency includes paper currency, coins, cards, and digital wallets and all of this is controlled by banks and governments which means all transactions are observed by the centralized regulatory authority. In the year 2009 cryptocurrency was born as a form of digital payment currency. Cryptocurrency value is increasing another way we can mine cryptocurrencies like bitcoin. Over the years there has been an ongoing debate regarding its use, whether it is a good and/ or safe investment, is it legal to use cryptocurrency the same way we use paper currency, etc. This paper gatherers information by analyzing and studying the different laws, legality, trading, and how different countries have used it as an approach to boost their economy, some countries have allowed individuals to trade without their profits being taxable, while those of business profits are and how some countries have allowed its use but are banned by the banks.
In the wake of financial crises, stablecoins are gaining adoption among digital currencies. We discuss how stablecoins help reduce the volatility of cryptocurrencies by surveying different types of stablecoins and their stability mechanisms. We classify different approaches to stablecoins in three main categories i) fiat or asset backed, ii) crypto-collateralized and iii) algorithmic stablecoins, giving examples of concrete projects in each class. We assess the relative tradeoffs between the different approaches. We also discuss challenges associated with the future of stablecoins and their adoption, their adoption and point out future research directions.
Participation in permissionless blockchains results in competition over system resources, which needs to be controlled with fees. Ethereum's current fee mechanism is implemented via a first-price auction that results in unpredictable fees as well as other inefficiencies. EIP-1559 is a recent, improved proposal that introduces a number of innovative features such as a dynamically adaptive base fee that is burned, instead of being paid to the miners. Despite intense interest in understanding its properties, several basic questions such as whether and under what conditions does this protocol self-stabilize have remained elusive thus far. We perform a thorough analysis of the resulting fee market dynamic mechanism via a combination of tools from game theory and dynamical systems. We start by providing bounds on the step-size of the base fee update rule that suffice for global convergence to equilibrium via Lyapunov arguments. In the negative direction, we show that for larger step-sizes instability and even formally chaotic behavior are possible under a wide range of settings. We complement these qualitative results with quantitative bounds on the resulting range of base fees. We conclude our analysis with a thorough experimental case study that corroborates our theoretical findings.
Abdulnasser Hatemi‐J, Mohamed Ali Hajji, Elie Bouri, Rangan Gupta
This paper investigates the potential portfolio diversification between Bitcoin, bonds, equities, and the US dollar. We make use of two approaches for constructing the portfolio. The first is the standard minimum variance approach, and the alternative is based on combining risk and return when the portfolio is constructed. The portfolio based on the minimum variance approach does not result in increasing the return per unit of risk compared to the corresponding value for the best single asset, in this case, Bitcoin. However, the portfolio based on the approach that combines risk and return in the optimization problem does show a return per unit risk higher than the corresponding value for any of the four assets. Thus, the portfolio diversification benefit with respect to these four assets, in terms of return per unit risk, exists only if the portfolio is constructed via the new approach.
By William Luther. How might we reconcile the regression theorem with the emergence of bitcoin? Luther responds to Pickering's argument that the "purpose and requirements of the regression theorem" have been misinterpreted.
Theresa Grafeneder-Weissteiner, Ingrid Kubin, Klaus Prettner, Alexia Prskawetz · 5 authors
This article introduces a social planner version of a model central to the New Economic Geography for explicitly answering whether the symmetric equilibrium outcome of the decentralized market economy is socially desirable. We find that savings incentives are too weak, resulting in an inefficiently low capital stock and therefore an inadequate number of product varieties. The optimal subsidy and taxation scheme to remedy these distortions resulting from the monopolistic competition structure is shown to be a sales subsidy financed by a lump-sum tax that results in marginal cost pricing. Interestingly, implementing this optimal policy might actually destroy the stability of the symmetric equilibrium and result in unintended agglomeration processes.