Blockchain protocols differ in fundamental ways, including the mechanics of selecting users to produce blocks (e.g., proof-of-work vs. proof-of-stake) and the method to establish consensus (e.g., longest chain rules vs. BFT-inspired protocols). These fundamental differences have hindered "apples-to-apples" comparisons between different categories of blockchain protocols and, in turn, the development of theory to formally discuss their relative merits. This paper presents a parsimonious abstraction sufficient for capturing and comparing properties of many well-known permissionless blockchain protocols, simultaneously capturing essential properties of both proof-of-work and proof-of-stake protocols, and of both longest-chain-type and BFT-type protocols. Our framework blackboxes the precise mechanics of the user selection process, allowing us to isolate the properties of the selection process which are significant for protocol design. We illustrate our framework's utility with two results. First, we prove an analog of the CAP theorem from distributed computing for our framework in a partially synchronous setting. This theorem shows that a fundamental dichotomy holds between protocols (such as Bitcoin) that are adaptive, in the sense that they can function given unpredictable levels of participation, and protocols (such as Algorand) that have certain finality properties. Second, we formalize the idea that proof-of-work (PoW) protocols and non-PoW protocols can be distinguished by the forms of permission that users are given to carry out updates to the state.
Lewis Gudgeon, Sam M. Werner, Daniel Pérez, William J. Knottenbelt
We coin the term *Protocols for Loanable Funds (PLFs)* to refer to protocols\nwhich establish distributed ledger-based markets for loanable funds. PLFs are\nemerging as one of the main applications within Decentralized Finance (DeFi),\nand use smart contract code to facilitate the intermediation of loanable funds.\nIn doing so, these protocols allow agents to borrow and save programmatically.\nWithin these protocols, interest rate mechanisms seek to equilibrate the supply\nand demand for funds. In this paper, we review the methodologies used to set\ninterest rates on three prominent DeFi PLFs, namely Compound, Aave and dYdX. We\nprovide an empirical examination of how these interest rate rules have behaved\nsince their inception in response to differing degrees of liquidity. We then\ninvestigate the market efficiency and inter-connectedness between multiple\nprotocols, examining first whether Uncovered Interest Parity holds within a\nparticular protocol and second whether the interest rates for a particular\ntoken market show dependence across protocols, developing a Vector Error\nCorrection Model for the dynamics.\n
The emergence of cryptocurrencies has been one of the most notable monetary phenomenon of the last decade. Many academics and analysts have found a clear precedent to this event in Friedrich Hayek's latest monetary work, Denationalization of money. The aim of this article is to analyze what we can learn about cryptocurrencies by re-reading this book. As will be proven, Hayek would surely have rejected the idea that Bitcoin and cryptocurrencies with similar characteristics could be accepted as money in the market. Furthermore, this paper will prove that a very close connection between Stablecoins and private money exists, following the Austrian economist’s predictions in a context of monetary competition.
Charles Bertucci, Louis Bertucci, Jean‐Michel Lasry, Pierre‐Louis Lions
We present an analysis of the Proof-of-Work consensus algorithm, used on the Bitcoin blockchain, using a Mean Field Game framework. Using a master equation, we provide an equilibrium characterization of the total computational power devoted to mining the blockchain (hashrate). From a simple setting we show how the master equation approach allows us to enrich the model by relaxing most of the simplifying assumptions. The essential structure of the game is preserved across all the enrichments. In deterministic settings, the hashrate ultimately reaches a steady state in which it increases at the rate of technological progress. In stochastic settings, there exists a target for the hashrate for every possible random state. As a consequence, we show that in equilibrium the security of the underlying blockchain is either $i)$ constant, or $ii)$ increases with the demand for the underlying cryptocurrency.
Chad Albrecht, Steven R. Hawkins, Kristopher McKay Duffin
Cryptocurrency, and especially Bitcoin, has struggled to gain recognition as a legitimate currency from governments, financial institutions, and consumers. This has occurred because many analysts and consumers believe that Bitcoin is not a stable and consistent store of value, a unit of measurement, or a medium of exchange. One way to overcome this challenge is for Bitcoin to be used as both a currency and store of value by a greater percentage of the world’s population. This paper seeks to identify how a change in Bitcoin’s monetary measurement (or denomination) can more easily facilitate Bitcoin transactions to increase its use. Specifically, we posit that applying whole number bias theory, from the cognitive psychology and mathematics fields, to Bitcoin’s unit of measurement will allow the value of Bitcoin to be referenced in smaller and easier tounderstand units with fewer numbers after the decimal point—such as the “Bit” or the “Satoshi.” In the process, the use of Bitcoin will include more whole numbers and allow the general public to more easily assign value to Bitcoin in day-to-day transactions.
Anwar Hasan Abdullah Othman, Syed Musa Alhabshi, Salina Kassim, Adam Abdullah · 5 authors
Purpose This study uses the autoregressive distributed lag model (ARDL) econometric approach to investigate empirically the effects of cryptocurrencies, the gold standard and traditional fiat money on global income inequality measured based on the Gini coefficient, and various ratios of income inequality distribution such as top 1 per cent, top 10 per cent, top 40 per cent and top 50 per cent. Design/methodology/approach The study uses the ARDL econometric approach. Findings The findings indicated that cryptocurrency and gold standard monetary systems contributed significantly to reducing global inequality of income and wealth distribution. Conversely, the traditional fiat money system contributes positively to global income and wealth inequality while also contributing significantly to their fluctuation. Practical implications This suggests that the fiat monetary system results in the coercive redistribution of income and wealth if governments pursue a social welfare policy. They must resolve this conflict between the current fiat monetary system and social policy by opting for an alternative monetary system such as cryptocurrency or gold standard. These alternative monetary systems offer the promise of resolving the income and wealth inequality associated with the traditional monetary system which are accompanied with the channels of inflation, lack of financial inclusion and debt creation, and to offer a more sustainable financial system. Originality/value The study recommends that monetary policy must be revisited to account for its direct effect on income and wealth redistribution to achieve social welfare goals.
In the digital economy era, the development of a distributed robust economy system has become increasingly important. The blockchain technology can be used to build such a system, but current mainstream consensus protocols are vulnerable to attack, making blockchain systems unsustainable. In this paper, we propose a new Robust Proof of Stake (RPoS) consensus protocol, which uses the amount of coins to select miners and limits the maximum value of the coin age to effectively avoid coin age accumulation attack and Nothing-at-Stake (N@S) attack. Under a comparison framework, we show that the RPoS equals or outperforms Proof of Work (PoW) protocol and Proof of Stake (PoS) protocol in three dimensions: energy consumption, robustness, and transaction processing speed. To compare the three consensus protocols in terms of trade efficiency, we built an agent-based model and find that RPoS protocol has greater or similar trade request-satisfied ratio than PoW and PoS. Hence, we suggest that RPoS is very suitable for building a robust digital economy distributed system.
We are interested in mining incentives in the Bitcoin protocols. The blockchain Bitcoin. The mining process is used to confirm and secure all transactions in the network. This process is organized as a speed game between individuals or groups, referred to as "miners" or "pools of miners", respectively. Miners or pools of miners use different computational powers to solve a mathematical problem, obtain a proof-of-work, spread their solution, and this solution is verified by the community before the block is added in the only public blockchain replicated over all nodes. First, we define and specify this game in the case with n players, n 2, under the assumptions denoted by (H) below. Next, we analytically find its Nash equilibrium points. In other words, we generalize the idea of [1] by taking into account the hypotheses of Peter Rizun's paper [2], through cumbersome computations. Our purpose here is to show some intuitions about the model rather than derive applicable results.
Classical monetary systems regularly subject the most vulnerable majority of the world's population to debilitating financial shocks, and have manifestly allowed uncontrolled global inequality over the long term. Given these basic failures, how can we avoid asking whether mainstream macroeconomic principles are actually compatible with democratic principles such as equality or the protection of human rights and dignity? This idea paper takes a constructive look at this question, by exploring how alternate monetary principles might result in a form of money more compatible with democratic principles -- dare we call it "democratic money"? In this alternative macroeconomic philosophy, both the supply of and the demand for money must be rooted in people, so as to give all people both equal opportunities for economic participation. Money must be designed around equality, not only across all people alive at a given moment, but also across past and future generations of people, guaranteeing that our descendants cannot be enslaved by their ancestors' economic luck or misfortune. Democratic money must reliably give all people a means to enable everyday commerce, investment, and value creation in good times and bad, and must impose hard limits on financial inequality. Democratic money must itself be governed democratically, and must economically facilitate the needs of citizens in a democracy for trustworthy and unbiased information with which to make wise collective decisions. An intriguing approach to implementing and deploying democratic money is via a cryptocurrency built on a proof-of-personhood foundation, giving each opt-in human participant one equal unit of stake. Such a cryptocurrency would have both interesting similarities to, and important differences from, a Universal Basic Income (UBI) denominated in an existing currency.
Abstract Blockchain networks have attracted tremendous attention for creating cryptocurrencies and decentralized economies built on peer-to-peer protocols. However, the complex nature of the dynamics and feedback mechanisms within these economic networks has rendered it difficult to reason about the growth and evolution of these networks. Hence, proper mathematical frameworks to model and analyze the behavior of blockchain-enabled networks are essential. To address this need, we establish a formal mathematical framework, based on dynamical systems, to model the core concepts in blockchain-enabled economies. Drawing on concepts from differential games, control engineering, and stochastic dynamical systems, this paper proposes a methodology to model, simulate, and engineer networked token economies. To illustrate our framework, a model of a generalized token economy is developed, where miners provide a commodity service to a platform in exchange for a cryptocurrency and users consume a service from the platform. We illustrate the dynamics of token economies by simulating and testing two different block reward strategies. We then conclude by outlining future research directions that will integrate additional methods from signal processing and control theory into the toolkit for designers of blockchain-enabled economic systems.
We model the competition over mining resources and over several cryptocurrencies as a non-cooperative game. Leveraging results about congestion games, we establish conditions for the existence of pure Nash equilibria and provide efficient algorithms for finding such equilibria. We account for multiple system models, varying according to the way that mining resources are allocated and shared and according to the granularity at which mining puzzle complexity is adjusted. When constraints on resources are included, the resulting game is a constrained resource allocation game for which we characterize a normalized Nash equilibrium. Under the proposed models, we provide structural properties of the corresponding types of equilibrium, e.g., establishing conditions under which at most two mining infrastructures will be active or under which no miners will have incentives to mine a given cryptocurrency.
This paper studies the dynamic construction of a blockchain by competitive miners. In contrast to the literature, we assume a finite time horizon. Moreover, miners are rewarded for blocks that eventually become part of the longest chain. It is shown that popular mining strategies such as adherence to conservative mining or to the longest-chain rule constitute pure-strategy Nash equilibria. However, these equilibria are not subgame perfect.
We study how financial frictions amplify labor supply shocks in a macroeconomic model with occasionally binding financing constraints. Workers supply labor to entrepreneurs who borrow to purchase factors of production. Borrowing capacity is restricted by the value of capital, generating a pecuniary externality when financing constraints bind. Additionally, there is a distributive externality operating through wages. The planner's allocation can be decentralized with two instruments: a credit tax/subsidy and a labor tax/subsidy. Labor shocks, such as the COVID-19 shock, amplify the policy responses, which critically depend on whether financing constraints bind or not.
Are cryptocurrencies indeed currencies? Anecdotal evidence on the volatility of cryptocurrency prices suggest that these “currencies” are not a good store of value, and similarly the time delays in validating and publishing crypto-based transactions suggest that they are not a good medium of exchange either. Due to the context it is defined in, it seems to not follow social conventions of fiat currencies. In this thesis, we undertake a systematic evaluation of how much do cryptocurrency prices behave like fiat currency prices, focusing on the predominant cryptocurrency — Bitcoin. We test the usefulness of various time series and structural models to predict future changes in Bitcoin prices and conclude that when predicting out of sample, its price is as unpredictable as fiat currency prices. Since cryptocurrencies generally have no central authority and hence receive no regulation, we explore its country-dependent characteristics, and find that the overall conclusions apply. We also examine if nominal interest rate differentials denominated in fiat currencies versus Bitcoin predict exchange rate movements, and find that in addition to the persistent violation in short-run, interest parity suggest that Bitcoin price has not been rising fast enough. We conclude that we have to refine the definition of monetary parameters on cryptocurrencies to better capture its properties, but as far as our examination indicates, the price of the predominant cryptocurrencies behaves similarly to most fiat currencies. In our point of view, Bitcoin is a currency.<br>
T Diana Cristina Bueno, Julio Cesar de (Org.) Aguiar
The purpouse of this paper is analyse if the called bitcoin can be defined as currency.Therefore, first is analysed the bitcoin tecnology, specially its structuring from the encryption development by blockchain. The main characteristics of this technological structure are studied, wich allowed its fast diffusion, with the sufficient confidence and security in the transactions, at low cost, without the intervention of third parties, be it the State or the banking system.Later, the study turns to the concept of money, from the economic point of view, under the focus of the main theories developed. At this point, a special analysis is made from the studies of the Austrian school of economics, especially by Luwig von Mises and his regression theorem, developed to explain the origin of the currency. Once these parameters have been established, bitcoin attributes are analyzed, having this paper concluded that its volatility and lack of liquidity prevent, for the moment, its characterization as currency. It should be noted that this paper serves as a starting point for future work on the legal effects of bitcoin, in particular in criminal law. However, it is necessary to define the nature of bitcoin.
In the first chapter, To Pool or Not to Pool? Security Design in OTC Markets with Vincent Glode and Christian C. Opp, we study security issuers' decision whether to pool assets when facing counterparties endowed with market power, as is common in over-the-counter markets. Unlike in competitive markets, pooling assets may be suboptimal in the presence of market power --- both privately and socially --- in particular, when the potential gains from trade are large. In these cases, pooling assets reduces the elasticity of trade volume in the relevant part of the payoff distribution, exacerbating inefficient rationing associated with the exercise of market power. Our results shed light on recently observed time-variation in the prevalence of pooling in financial markets. In the second chapter, Selling to Investor Network: Allocations in the Primary Corporate Bond Market, I develop a model of the primary market for corporate bonds, in which an issuer optimally chooses an issuance price and allocations to investors based on their trading connections in the secondary over-the-counter market. Expected secondary market liquidity, which depends on the structure of the trading network in this market, determines investors' demands in the primary market and, in turn, the issuer's revenues. I show that trading by less connected investors has a relatively high negative impact on expected secondary market liquidity and disproportionately reduces the demands of all investors in the primary market. As a result, the issuer can increase her profits by restricting allocations of new bonds only to more connected investors. This explains the commonly observed exclusion of small institutional investors from the primary market, which is often coupled with seemingly underpriced bonds. In the third chapter, Initial Coin Offerings as a Commitment to Competition with Itay Goldstein and Deeksha Gupta, we model Initial Coin Offerings (ICOs) of utility tokens, which are increasingly used to finance the development of online platforms where buyers and sellers can meet to exchange services or goods. Utility tokens serve as the sole medium of exchange on a platform and can be traded in a secondary market. We show that such a financing mechanism allows an entrepreneur to give up monopolistic rents associated with the control of the platform and make a credible commitment to long-run competitive prices. The entrepreneur optimally chooses to have an ICO, rather than operate as a monopolist, only if future consumers of the platform participate in financing. ICOs, therefore, endogenously require crowd-funding to be viable.
This chapter studies the challenges a cryptocurrency faces to become a common means of exchange. In particular, the paper discusses the scalability constraint that limits the number of transactions a cryptocurrency may be able to verify per unit of time, the network effect in goods that function as money that increases the cost of new currencies to gain market share, and the implications of the fixed monetary rule present in most cryptocurrencies that departs from an elastic optimal monetary policy. Potential solutions for each case are also discussed.
Sameti Morteza, Mohammad Djawadi, Emadzadeh Mostafa
Theories of money and credit can be divided into two general categories: commodity theory of money and credit theory of money. Both categories
theoretically question the acceptance of cryptocurrencies as money. The present study aimed to provide a new interpretation of the Theory of
Money and Credit in relation to both theories mentioned above. First, the functions of public trust was taken as a commodity, which is consistent
with Karl Mengers views and the subjective theory of value. Based on this approach, the definitions of the credit theory of money will be acceptable
with a new interpretation. This new interpretation also involves an extension of Hayek's definition of money, which is consistent with Mises'
definition of money. Then, the concept of intertemporal preferences, with an emphasis on the barter root of money based on Mises regression
theorem, was used to show that cryptocurrencies can be accepted as money as far as they serve as private currency and suit the computability of
dynamics of Underlying Economic Realities with intertemporal preferences. Therefore, the main criterion for defining money is how it affects
intertemporal preferences
We show that recent technological innovations have significantly improved the efficiency of Bitcoin as a means of payment. We study three particular innovations: the Lightning Network, a means of netting payments off the blockchain; SegWit, an improvement to the way data are stored on the blockchain; and Bitcoin Cash, a new cryptocurrency forked from Bitcoin. We find a robust and significant association between adoption of the Lightning Network and reduced blockchain congestion. This improvement cannot be explained by other factors, such as changes in speculative demand for Bitcoin. We show that the Lightning Network has become increasingly centralised, with payments channelled through relatively few intermediaries. Finally, we argue that improved functioning of Bitcoin is positive for welfare, and may reduce the environmental footprint of Bitcoin mining.