Blockchain Papers

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Gianmaria Del Monte, Diego Pennino, Maurizio Pizzonia

Public blockchains should be able to scale with respect to the number of nodes and to the transactions workload. The blockchain scalability trilemma has been informally conjectured. This is related to scalability, security and decentralization, stating that any improvement in one of these aspects should negatively impact on at least one of the other two. In fact, despite the large research and experimental effort, all known approaches turn out to be tradeoffs. We theoretically describe a new blockchain architecture that scales to arbitrarily high workload provided that a corresponding proportional increment of nodes is provisioned. We show that, under reasonable assumptions, our approach does not require tradeoffs on security or decentralization. To the best of our knowledge, this is the first result that disprove the trilemma considering the scalability of all architectural elements of a blockchain and not only the consensus protocol. While our result is currently only theoretic, we believe that our approach may stimulate significant practical contributions.

F. N. M. de Sousa Filho, J. N. Silva, Mário Augusto Bertella, Edgardo Brigatti

In this paper, we explore some stylized facts of the Bitcoin market using the BTC-USD exchange rate time series of historical intraday data from 2013 to 2020. Bitcoin presents some very peculiar idiosyncrasies, like the absence of macroeconomic fundamentals or connections with underlying assets or benchmarks, an asymmetry between demand and supply and the presence of inefficiency in the form of strong arbitrage opportunity. Nevertheless, all these elements seem to be marginal in the definition of the structural statistical properties of this virtual financial asset, which result to be analogous to general individual stocks or indices. In contrast, we find some clear differences, compared to fiat money exchange rates time series, in the values of the linear autocorrelation and, more surprisingly, in the presence of the leverage effect. We also explore the dynamics of correlations, monitoring the shifts in the evolution of the Bitcoin market. This analysis is able to distinguish between two different regimes: a stochastic process with weaker memory signatures and closer to Gaussianity between the Mt. Gox incident and the late 2015, and a dynamics with relevant correlations and strong deviations from Gaussianity before and after this interval.

Ariah Klages‐Mundt, Dominik Harz, Lewis Gudgeon, Junyou Liu · 5 authors

Stablecoins are one of the most widely capitalized type of cryptocurrency. However, their risks vary significantly according to their design and are often poorly understood. We seek to provide a sound foundation for stablecoin theory, with a risk-based functional characterization of the economic structure of stablecoins. First, we match existing economic models to the disparate set of custodial systems. Next, we characterize the unique risks that emerge in non-custodial stablecoins and develop a model framework that unifies existing models from economics and computer science. We further discuss how this modeling framework is applicable to a wide array of cryptoeconomic systems, including cross-chain protocols, collateralized lending, and decentralized exchanges. These unique risks yield unanswered research questions that will form the crux of research in decentralized finance going forward.

Kwok Ping Tsang, Zichao Yang

No abstract is available for this record.

Vijay Mohan

No abstract is available for this record.

Yongge Wang

This paper compares mathematical models for automated market makers including logarithmic market scoring rule (LMSR), liquidity sensitive LMSR (LS-LMSR), constant product/mean/sum, and others. It is shown that though LMSR may not be a good model for Decentralized Finance (DeFi) applications, LS-LMSR has several advantages over constant product/mean based automated market makers. However, LS-LMSR requires complicated computation (i.e., logarithm and exponentiation) and the cost function curve is concave. In certain DeFi applications, it is preferred to have computationally efficient cost functions with convex curves to conform with the principle of supply and demand. This paper proposes and analyzes constant circle/ellipse based cost functions for automated market makers. The proposed cost functions are computationally efficient (only requires multiplication and square root calculation) and have several advantages over widely deployed constant product cost functions. For example, the proposed market makers are more robust against front-runner (slippage) attacks.

Hanna Hałaburda, Guillaume Haeringer, Joshua S. Gans, Neil Gandal

This chapter focuses on how bitcoin performs the functions of money. A better understanding of where cryptocurrencies fall short of fiat money might allow for a better design and might possibly decrease price volatility. The medium of exchange function means a generally accepted form of payment. The Haitian gourde, for example, is fiat money in Haiti. General acceptance of various forms of fiat money is limited. To function as a medium of exchange, a currency needs a low transaction cost. Transaction costs have both domestic and international dimensions. Cryptocurrency is faster and sometimes cheaper for international and long-distance domestic transactions, whereas fiat money is cheaper for local domestic transactions. The Lightning Network technology reduces transaction costs for parties that can pool bitcoin transactions without converting into and out of fiat currency each time. Bitcoin provides users with other valuable features, such as financial privacy. Fiat money in the form of physical cash offers excellent privacy.

Alfred Lehar, Christine A. Parlour

Bitcoin users can offer fees to the miners who record transactions on the blockchain. We document the blockchain rarely runs at capacity, even though there appears to be excess demand and higher fee orders are not always prioritized. We show this is inconsistent with competitive mining, but is consistent with miners exercising market power. If users believe that only high fee transactions will be executed expeditiously then we show how strategic capacity management can be used to increase fee revenue. Using a novel data set, we present evidence consistent with strategic capacity management. We show that mining pools facilitate collusion, and estimate that they have extracted least 300 million USD a year in excess fees by making processing capacity artificially scarce.

Elena Sinelnikova-Muryleva, Kirill Shilov, Andrey Zubarev

The aim of the article is to systematize the views on the concept of cryptocurrency from the literature and among international and national organizations and regulators, to analyze its economic essence and the place in the modern monetary and financial system. The definition and the functions of cryptocurrency are discussed in the framework of descriptive and theoretical analysis. The paper systematized the existing approaches to the concept analysis of cryptocurrency; the place of cryptocurrency in modern economic theory is shown.The article concludes that cryptocurrencies are often determined through the set of basic characteristics. Cryptocurrencies are not money, though they can perform the main function of money — to be a means of payment; they can be a means of making settlements, assets, platforms for concluding smart contracts, a means for crowdfunding. They are not private money in Hayek’s interpretation. Cryptocurrencies can be described in the framework of the models of new monetarism (payment economics).

Reilly White, Yorgos Marinakis, Nazrul Islam, Steven T. Walsh

Cryptocurrencies such as Bitcoin have fascinated technologists and investors alike. They have become prevalent, with over 2,000 Bitcoin-like cryptocurrencies now in use. Most jurisdictions have not regulated cryptocurrencies. Whether existing regulations apply to cryptocurrency turns ultimately on if we classify cryptocurrencies as currencies, securities, or derivatives, or a money services (transfer) vehicle. In this set of exploratory analyses we seek to classify Bitcoin. We utilize a variety of methods to compare aspects of its behavior to: currencies, asset classes such as derivatives, technology-based products and possible technology-based products such as Ether and the security SPY, and speculative financial bubbles. We find that Bitcoin's behavior more closely resembles a technology-based product, an emerging asset class, or a bubble event, rather than a currency or a security; such that it is correct that existing currency and security laws should not apply to cryptocurrencies.

Binali Selman EREN, Mustafa Salim Erek

This paper aims to examine the relationship between Bitcoin and preeminent financial indicators using Copula-GARCH method. In the study, we use closing prices of Bitcoin and US 10-Year Bond Yield, Gold Spot US Dollar, US Dollar Index, S&P 500, FTSE 100 and NIKKEI 225. To our knowledge, our paper is the first to examine this issue empirically. Analysis results show that there is no strong interdependence between Bitcoin and preeminent financial indicators. These findings provide new information that will benefit policy makers, banks, financial investors, and risk managers in trading activities for both long-term and short-term strategies.

Zongxi Li, A. Max Reppen, Ronnie Sircar

We propose a mean field game model to study the question of how centralization of reward and computational power occur in Bitcoin-like cryptocurrencies. Miners compete against each other for mining rewards by increasing their computational power. This leads to a novel mean field game of jump intensity control, which we solve explicitly for miners maximizing exponential utility and handle numerically in the case of miners with power utilities. We show that the heterogeneity of their initial wealth distribution leads to greater imbalance of the reward distribution, and increased wealth heterogeneity over time, or a “rich get richer” effect. This concentration phenomenon is aggravated by a higher Bitcoin mining reward and reduced by competition. Additionally, an advantaged miner with cost advantages such as access to cheaper electricity, contributes a significant amount of computational power in equilibrium, unaffected by competition from less efficient miners. Hence, cost efficiency can also result in the type of centralization seen among miners of cryptocurrencies. This paper was accepted by Kay Giesecke, finance. Funding: A. M. Reppen is partly supported by the Swiss National Science Foundation [Grant SNF 181815]. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4798 .

Stanisław Drożdż, Ludovico Minati, Paweł Oświȩcimka, Marek Stanuszek · 5 authors

Cross correlations in fluctuations of the daily exchange rates within the basket of the 100 highest-capitalization cryptocurrencies over the period October 1, 2015-March 31, 2019 are studied. The corresponding dynamics predominantly involve one leading eigenvalue of the correlation matrix, while the others largely coincide with those of Wishart random matrices. However, the magnitude of the principal eigenvalue, and thus the degree of collectivity, strongly depends on which cryptocurrency is used as a base. It is largest when the base is the most peripheral cryptocurrency; when more significant ones are taken into consideration, its magnitude systematically decreases, nevertheless preserving a sizable gap with respect to the random bulk, which in turn indicates that the organization of correlations becomes more heterogeneous. This finding provides a criterion for recognizing which currencies or cryptocurrencies play a dominant role in the global cryptomarket. The present study shows that over the period under consideration, the Bitcoin (BTC) predominates, hallmarking exchange rate dynamics at least as influential as the U.S. dollar (USD). Even more, the BTC started dominating around the year 2017, while other cryptocurrencies, such as the Ethereum and even Ripple, assumed similar trends. At the same time, the USD, an original value determinant for the cryptocurrency market, became increasingly disconnected, and its related characteristics eventually started approaching those of a fictitious currency. These results are strong indicators of incipient independence of the global cryptocurrency market, delineating a self-contained trade resembling the Forex.

Voshmgir Shermin, Michael Zargham

Blockchain networks and similar cryptoeconomic networks are systems, specifically complex systems. They are adaptive networks with multiscale spatio-temporal dynamics. Individual actions may be incentivized towards a collective goal with “purpose-driven” tokens. Blockchain networks, for example, are equipped cryptoeconomic mechanisms that allow the decentralized network to simultaneously maintain a universal state layer, support peer-to-peer settlement, and incentivize collective action. These networks represent an institutional infrastructure upon which socioeconomic collaboration is facilitated – in the absence of intermediaries or traditional organizations. They provide a mission-critical and safety-critical regulatory infrastructure for autonomous agents in untrusted economic networks. Their tokens provide a rich, real-time data set reflecting all economic activities in their systems. Advances in network science and data science can thus be leveraged to design and analyze these economic systems in a manner consistent with the best practices of modern systems engineering. Research that reflects all aspects of these socioeconomic networks needs (i) a complex systems approach, (ii) interdisciplinary research, and (iii) a combination of economic and engineering methods, here referred to as “economic systems engineering,” for the regulation and control of these socioeconomic systems. This manuscript provides a conceptual framework synthesizing the research space and proceeds to outline specific research questions and methodologies for future research in this field, applying an inductive approach based on interdisciplinary literature review and relative contextualization of the works cited.

Katarzyna Włosik

Bitcoin can be exchanged for other cryptocurrencies as well as for fiat currencies on many different platforms. Nevertheless, its real convertibility may be limited by market liquidity. The main aim of this article is to characterize and compare big and small bitcoin markets in terms of liquidity. I examine four platforms with high trade volume: Kraken, Bitstamp, BitFlyer and BTCBOX, as well as small entities which enable bitcoin to be traded in Polish zloty: BitBay and BitMarket. I compare the number of trades and the time between trades on selected bitcoin markets, determine the volume distribution throughout the day and analyse the dynamics of Amihud’s illiquidity measure – ILLIQ. I find that an exchange which is among the global leaders in terms of trading bitcoin in a particular traditional currency can be considered a smaller market in terms of trade volume in another traditional currency. Moreover, the results imply that BitBay and BitMarket can be perceived as local markets. They are mainly used for trading in Polish zloty, and are illiquid in terms of trading in the remaining traditional currencies. Home bias, the fact that they offer a possibility of trading in a less popular currency (in comparison to the world reserve currencies), and that have their interface in Polish, may give these platforms a competitive advantage.

Clinton Ehrlich, Anna Guzova

This paper applies biomimetic engineering to the problem of permissionless Byzantine consensus and achieves results that surpass the prior state of the art by four orders of magnitude. It introduces a biologically inspired asymmetric Sybil-resistance mechanism, Proof-of-Balance, which can replace symmetric Proof-of-Work and Proof-of-Stake weighting schemes. The biomimetic mechanism is incorporated into a permissionless blockchain protocol, Key Retroactivity Network Consensus (KRNC), which delivers ~40,000 times the security and speed of today's decentralized ledgers. KRNC allows the fiat money that the public already owns to be upgraded with cryptographic inflation protection, eliminating the problems inherent in bootstrapping new currencies like Bitcoin and Ethereum. The paper includes two independently significant contributions to the literature. First, it replaces the non-structural axioms invoked in prior work with a new formal method for reasoning about trust, liveness, and safety from first principles. Second, it demonstrates how two previously overlooked exploits, book-prize attacks and pseudo-transfer attacks, collectively undermine the security guarantees of all prior permissionless ledgers.

Ireneusz Miciuła

The development of the cryptocurrency market and the implications for the whole economy and finance for all traders cause a keen interest in this subject. The chapter discusses the functioning of a financial system based on cryptocurrencies and its significance for economies. In this chapter, the development of the global cryptocurrency market was presented and the history of the most popular cryptocurrency, bitcoin, was analyzed. The analysis and the assessment of the state and structure of the Polish cryptocurrencies market were presented on the background of the global cryptocurrency market. Also, we presented the possible development paths for the cryptocurrencies market in Poland and in the world.

Nicola Dimitri

Confirmation of Bitcoin transactions is executed in blocks, which are then stored in the Blockchain. As compared to the number of transactions in the mempool, the set of transactions which are verified but not yet confirmed, available space for inclusion in a block is typically limited. For this reason, successful miners can only process a subset of such transactions, and users compete with each other to enter the next block by offering confirmation fees. Assuming that successful miners pursue revenue maximization, they will include in the block those mempool transactions that maximize earnings from related fees. In the paper we model transaction fees as a Nash Equilibrium outcome of an auction game with complete information. In the game the successful miner acts as an auctioneer selling block space, and users bid for shares of such space to confirm their transactions. Moreover, based on expected fees we also discuss what the optimal, revenue maximizing, block size limit should be for the successful miner. Consistently with the intuition, the optimal block size limit resolves the trade-off between including additional transactions (which possibly lower the unit fees collected) and keeping the block capacity limited (with, however, higher unit fees).

Michael Mainelli, Matthew Leitch, Dionysios S. Demetis

A cryptocurrency needs a relatively stable value if it is to fulfill the traditional functions of money and be useful as a currency. To achieve this, controls are needed within the ecosystem of the cryptocurrency. Although a simulation cannot predict future currency rates or other variables exactly, it is argued that a model that simulates a range of challenging behavior can be a useful testbed for control schemes. To illustrate and explore this idea, an agent-based economic model was used to simulate the early period of a hypothetical cryptocurrency and test two control mechanisms. The results suggest that this approach may be fruitful and that it may be important to include more than just coin minting within the control scheme. An economic simulation model is likely to be a valuable tool in developing and regulating effective cryptocurrency systems.

Julien Chevallier, Stéphane Goutte, Khaled Guesmi, Samir Saadi

This study contributes to the existing literature on the empirical characteristics of virtual currency allowing for a dynamic transition between different economic regimes and considering various crashes and rallies over the business cycle, that is captured by jumps. We combine Markov-switching models with Levy jump-diffusion offer a new model that captures the different sub-period of crises over the business cycle, that is captured by jumps. This method also enables to test the relevance of dynamic measures of regime switching concerning the independent pure-jump process, which are not frequently used in the literature. Bitcoin offers something different than a traditional currency; there is potential value of having a network that helps as a secure repository for the common knowledge of all transactions. Besides, the value of Bitcoin fluctuates so wildly that it may be too risky to serve as a credible store of value.

A. I. Il’inskii, Z. Mierzwa

The paper deals with the problems of measuring uneven wealth distribution in the bitcoin ecosystem. All existing bitcoin distribution models depend on the analysis of bitcoin wallets and bitcoin addresses. They are based on the Bitcoin Rich List. This approach is insufficient due to the inscrutable relationships between people owning bitcoin, bitcoin wallets, and bitcoin addresses. In this paper, we used the methods of comparative analysis resulted in graphics as represented by Lorentz and Lamé curves and distribution of the Gini coefficients and the Kolkata index. We identified empirical cumulative functions of wealth distribution and the number of addresses with positive balance during the bubble and after its explosion. Approximations of the distribution of ‘poor’ and ‘rich’ addresses have been obtained and compared with the other results from the cited literature. The general public views the equality of network members as synonymous with the equal distribution of wealth among them. Emerging financial bubbles, especially in the US financial markets, lead to an increase in income inequality. However, after a bubble explodes, the inequality falls to the initial level.

Markus K. Brunnermeier, Dirk Niepelt

We develop a generic model of money and liquidity that identifies sources of liquidity bubbles and seignorage rents.We provide sufficient conditions under which a swap of monies leaves the equilibrium allocation and price system unchanged.We apply the equivalence result to the "Chicago Plan,'' cryptocurrencies, the Indian de-monetization experiment, and Central Bank Digital Currency (CBDC).In particular, we show why CBDC need not undermine financial stability.

Akihiko Noda

This study examines whether the efficiency of cryptocurrency markets (Bitcoin and Ethereum) evolve over time based on Lo's (2004) adaptive market hypothesis (AMH). In particular, we measure the degree of market efficiency using a generalized least squares-based time-varying model that does not depend on sample size, unlike previous studies that used conventional methods. The empirical results show that (1) the degree of market efficiency varies with time in the markets, (2) Bitcoin's market efficiency level is higher than that of Ethereum over most periods, and (3) a market with high market liquidity has been evolving. We conclude that the results support the AMH for the most established cryptocurrency market.