Automated Market Makers (AMMs) have cemented themselves as an integral part of the decentralized finance (DeFi) space. AMMs are a type of exchange that allows users to trade assets without the need for a centralized exchange. They form the foundation for numerous decentralized exchanges (DEXs), which help facilitate the quick and efficient exchange of on-chain tokens. All present-day popular DEXs are static protocols, with fixed parameters controlling the fee and the curvature - they suffer from invariance and cannot adapt to quickly changing market conditions. This characteristic may cause traders to stay away during high slippage conditions brought about by intractable market movements. We propose a Reinforcement Learning (RL) framework to optimize the fees collected on an AMM protocol. In particular, we develop a Q-Learning Agent for Market Making Protocols (QLAMMP) that learns the optimal fee rates and leverage coefficients for a given AMM protocol and maximizes the expected fee collected under a range of different market conditions. We show that QLAMMP is consistently able to outperform its static counterparts under all the simulated test conditions.
In this paper, we investigate some economic fundamentals related to the Tezos blockchain platform under the Emmy* consensus protocol. The protocol is based on a liquid version of Proof-of-Stake, in the sense that users can temporarily delegate some or all of their Tz units to full nodes. In addition to increasing the stake of the full node, and thus the probability of being selected as a block baker/endorser, such delegation induces the property of the super-additivity of users’ selection probability of baking/endorsing a block. That is, with delegation, the selection probability may be larger than the sum of the selection probabilities without delegation. In this paper, we study how monetary holdings and stakes can evolve with time, also discussing the individual user and the market implications of delegation.
Haoxian Chen, Lan Lu, Brendan Massey, Yuepeng Wang · 5 authors
Smart contracts manage a large number of digital assets nowadays. Bugs in these contracts have led to significant financial loss. Verifying the correctness of smart contracts is, therefore, an important task. This paper presents an automated safety verification tool, DCV, that targets declarative smart contracts written in DeCon, a logic-based domain-specific language for smart contract implementation and specification. DCV proves safety properties by mathematical induction and can automatically infer inductive invariants using heuristic patterns, without annotations from the developer. Our evaluation on 20 benchmark contracts shows that DCV is effective in verifying smart contracts adapted from public repositories, and can verify contracts not supported by other tools. Furthermore, DCV significantly outperforms baseline tools in verification time.
We describe and analyze perishing mining, a novel block-withholding mining strategy that lures profit-driven miners away from doing useful work on the public chain by releasing block headers from a privately maintained chain. We then introduce the dual private chain (DPC) attack, where an adversary that aims at double spending increases its success rate by intermittently dedicating part of its hash power to perishing mining. We detail the DPC attack's Markov decision process, evaluate its double spending success rate using Monte Carlo simulations. We show that the DPC attack lowers Bitcoin's security bound in the presence of profit-driven miners that do not wait to validate the transactions of a block before mining on it.
Blockchain protocols’ main differentiator is their purported decentralization that unlocks various information technology applications that were supposedly impossible beforehand. The key promise is that incentive-driven participation of a large set of interested parties can lead to decentralized protocol states where no single operator can be a “single point of failure.” Despite this promise, there is little systematic analysis of decentralization in blockchain systems and the sporadic theoretic and empirical investigations that exist paint a rather negative picture due to resource “pooling behaviors” that are impossible to prevent in the “permissionless” setting of such protocols where parties have no designated identities.
Xiaotong Sun, Xi Chen, Charalampos Stasinakis, Georgios Sermpinis
Decentralized Autonomous Organization (DAO) provides a decentralized governance solution through blockchain, where decision-making process relies on on-chain voting and follows majority rule. This paper focuses on MakerDAO, and we find three voter coalitions after applying clustering algorithm to voting history. The emergence of a dominant voter coalition is a signal of governance centralization in DAO, and voter coalitions have complicated influence on Maker protocol, which is governed by MakerDAO. This paper presents empirical evidence of multicoalition democracy in DAO and further contributes to the contemporary debate on whether decentralized governance is possible.
Yield farming represents an immensely popular asset management activity in decentralized finance (DeFi). It involves supplying, borrowing, or staking crypto assets to earn an income in forms of transaction fees, interest, or participation rewards at different DeFi marketplaces. In this systematic survey, we present yield farming protocols as an aggregation-layer constituent of the wider DeFi ecosystem that interact with primitive-layer protocols such as decentralized exchanges (DEXs) and loanable funds (PLFs) protocol for loanable funds (PLF). We examine the yield farming mechanism by first studying the operations encoded in the yield farming smart contracts, and then performing stylized, parameterized simulations on various yield farming strategies. We conduct a thorough literature review on related work, and establish a framework for yield farming protocols that takes into account pool structure, accepted token types, and implemented strategies. Using our framework, we characterize major yield aggregators in the market including Yearn Finance, Beefy, and Badger DAO. Moreover, we discuss anecdotal attacks against yield aggregators and generalize a number of risks associated with yield farming.
Marco Crosara, Luca Olivieri, Fausto Spoto, Fabio Tagliaferro
Abstract Many blockchain applications exchange tokens, such as bitcoin and ether, or implement them through smart contracts. A trend in blockchain is to apply standards for token interoperability, unchanged, from platform to platform, easing the design challenges with trusted and widely-used specifications. However, the exploitation of the target language semantics can result in technological advantages and more efficient contracts. This paper presents a re-engineering of OpenZeppelin’s implementation of the ERC-20 and ERC-721 standards in Takamaka, a Java framework for programming smart contracts. It describes a sound solution to the issue about the types allowed for the token holders and a novel implementation for making snapshots of tokens, based on tree maps, that is possible in Java, but not in Solidity, more efficient than the literal translation in Java from Solidity, within the Java virtual machine. Moreover, it applies to ERC-721 as well, where a snapshot mechanism was previously missing. The same snapshot mechanism can also be applied beyond the smart contracts for tokens.
Christoph Schlegel, Mateusz Kwaśnicki, Akaki Mamageishvili
We study axiomatic foundations for different classes of constant-function automated market makers (CFMMs). We focus particularly on separability and on different invariance properties under scaling. Our main results are an axiomatic characterization of a natural generalization of constant product market makers (CPMMs), popular in decentralized finance, on the one hand, and a characterization of the Logarithmic Scoring Rule Market Makers (LMSR), popular in prediction markets, on the other hand. The first class is characterized by the combination of independence and scale invariance, whereas the second is characterized by the combination of independence and translation invariance. The two classes are therefore distinguished by a different invariance property that is motivated by different interpretations of the numéraire in the two applications. However, both are pinned down by the same separability property. Moreover, we characterize the CPMM as an extremal point within the class of scale invariant, independent, symmetric AMMs with non-concentrated liquidity provision. Our results add to a formal analysis of mechanisms that are currently used for decentralized exchanges and connect the most popular class of DeFi AMMs to the most popular class of prediction market AMMs.
Jason Milionis, Dean Hirsch, Andy Arditi, Pranav Garimidi
Lately, Non-Fungible Tokens (NFTs), i.e., uniquely discernible assets on a blockchain, have skyrocketed in popularity by addressing a broad audience. However, the typical NFT auctioning procedures are conducted in various, ad hoc ways, while mostly ignoring the context that the blockchain provides, i.e., new possibilities, but at the same time new challenges in auction design. One of the main targets of this work is to shed light on the vastly unexplored design space of NFT Auction Mechanisms, especially in those characteristics that fundamentally differ from traditional and more contemporaneous forms of auctions. We focus on the case that bidders have a valuation for the auctioned NFT, i.e., what we term the single-item NFT auction case. In this setting, we formally define an NFT Auction Mechanism, give the properties that we would ideally like a perfect mechanism to satisfy (broadly known as incentive compatibility and collusion resistance) and prove that it is impossible to have such a perfect mechanism. Even though we cannot have an all-powerful protocol like that, we move on to consider relaxed notions of those properties that we may desire the protocol to satisfy, as a trade-off between implementability and economic guarantees. Specifically, we define the notion of an equilibrium-truthful auction, where neither the seller nor the bidders can improve their utility by acting non-truthfully, so long as the counter-party acts truthfully. We also define asymptotically second-price auctions, in which the seller does not lose asymptotically any revenue in comparison to the theoretically-optimal (static) second-price sealed-bid auction, in the case that the bidders' valuations are drawn independently from some distribution. We showcase why these two are very desirable properties for an auction mechanism to enjoy, and construct the first known NFT Auction Mechanism which provably possesses such formal guarantees.
Christoph Müller-Bloch, Jonas Valbjørn Andersen, Jason Spasovski, Jungpil Hahn
Blockchain systems allow for securely keeping shared records of transactions in a decentralised way. This is enabled by algorithms called consensus mechanisms. Proof-of-work is the most prominent consensus mechanism, but environmentally unsustainable. Here, we focus on proof-of-stake, its best-known alternative. Importantly, decentralised decision-making power is not an inherent feature of blockchain systems, but a technological possibility. Numerous security incidents illustrate that decentralised control cannot be taken for granted. We therefore study how key parameters affect the degree of decentralisation in proof-of-stake blockchain systems. Based on a real-world implementation of a proof-of-stake blockchain system, we conduct agent-based simulations to study how a range of parameters impact decentralisation. The results suggest that high numbers of initial potential validator nodes, large transactions, a high number of transactions, and a very high or very low positive validator network growth rate increase decentralisation. We find weak support for an impact of changes in transaction fees and initial stake distributions. Our study highlights how blockchain challenges our understanding of decentralisation in information systems research, and contributes to understanding the governance mechanisms that lead to decentralisation in proof-of-stake blockchain systems as well as to designing proof-of-stake blockchain systems that are prone to decentralisation and therefore more secure.
Florian Spychiger, Claudio J. Tessone, Liudmila Zavolokina, Gerhard Schwabe
Inspired by an industry initiative to address the celebrated market for lemons (poor-quality used cars), we investigate how incentives for a permissioned blockchain-based system in the automobile ecosystem can be designed to ensure high-quality data storage and use by different stakeholders. The peer-to-peer distributed ledger platform connects organizations and car owners with disparate interests and hidden intentions. While previous literature has chiefly examined incentives for permissionless platforms, we leverage studies about crowdsensing applications to stimulate research on incentives in permissioned blockchains. This article uses the action design research approach to create an incentive system featuring a rating mechanism influenced by data correction measures. Furthermore, we propose relying on certain institutions capable of assessing data generated within the system. This combined approach of a decentralized data correction and an institutionalized data assessment is distinct from similar incentive systems suggested by literature. By using an agent-based model with strategy evolution, we evaluate the proposed incentive system. Our findings indicate that a rating-based revenue distribution leads to markedly higher data quality in the system. Additionally, the incentive system reveals hidden information of the agents and alleviates agency problems, contributing to an understanding of incentive design in inter-organizational blockchain-based data platforms. Furthermore, we explore incentive design in permissioned blockchains and discuss its latest implications.
The worldwide targets for carbon-neutral societies increased the penetration of distributed generation and storage. Smart cities now play a key role in achieving these targets by considering the alliances of their demand and supply assets as local citizen energy communities. These communities need to have enough weight to trade electricity in wholesale markets. Trading of electricity can be done in spot markets or by bilateral contracts involving customers and suppliers. This paper is devoted to bilateral contracting, which is modeled as a negotiation process involving an iterative exchange of offers and counter-offers. This article focuses on local citizen energy communities. Specifically, it presents team and single-agent negotiation models, where each member has its sets of strategies and tactics and also its decision model. Community agents are equipped with intra-team strategies and decision protocols. To evaluate the benefits of CECs, models of both coalition formation and management have been adapted. This paper also describes a case study on forward bilateral contracts, involving a retailer agent and three different types of citizen energy communities. The results demonstrate the benefits of CECs during the negotiation of private bilateral contracts of electricity. Furthermore, they also demonstrate that in the case of using a representative strategy, the selection of the mediator may be critical for achieving a good deal.
Abstract In recent decades, the world has witnessed cloud computing as an essential technology that changes the traditional application Development and Operation (DevOps) lifecycle. However, current cloud software DevOps and Service Level Agreement (SLA) management often face challenges of 1) selecting the best fitting service providers, customizing services and planning capacities for large-scale distributed applications; 2) guaranteeing high-quality and trustworthy SLAs among multiple service providers; 3) enhancing the interoperability of cloud services across different providers; and 4) designing effective incentive models among stakeholders. This paper proposes a novel framework called Auction and Witness Enhanced trustworthy SLA for Open, decentralized service MarkEtplaces (AWESOME) to build a trustworthy cloud marketplace and address the above challenges. The proposed framework contains four subsystems: a customizable graphical user interface, an auction-based service selection model, a witness committee management mechanism, and a smart contract factory orchestration. We developed a prototype AWESOME decentralized application (DApp) based on the Ethereum blockchain. Extensive experiments are designed to evaluate the latency and cost of our model. The experimental results demonstrate that our model is economical and feasible.
In this paper, a delegate contract signing solution is proposed to eliminate the potential risk of contract fraud caused by information and interest asymmetry. By utilizing the functional properties of the Ethereum blockchain and smart contracts, a delegate contract signing mechanism is established. By running the mechanism, the delegate contract signing information is received and processed, and the information is broadcast to the blockchain network nodes. By designing the algorithms of "requesting contract signing", "successful contract signing" and "contract fraud dispute resolution", the delegate contract signing is realized. By proposing algorithms and their calling processes, the smart contracts are completed. Finally, the smart contracts based on the solution are tested and verified. The source code of the smart contracts has been published on GitHub.
Lorenzo Ceragioli, Letterio Galletta, Pierpaolo Degano, Luca Viganò
In a decentralized environment, exchanging resources requires users to bargain until an agreement is found. Moreover, human agreements involve a combination of collaborative and selfish behavior and often induce circularity, complicating the evaluation of exchange requests. We introduce MuAC, a policy language that allows users to state in isolation under which conditions they are open to grant their resources and what they require in return. In MuAC, exchange requests are evaluated automatically with the guarantee that the only exchanges that will take place are those that mutually satisfy users' conditions. Moreover, MuAC can be used as an enforcement mechanism to prevent users from cheating. As a proof of concept, we implement a blockchain smart contract that allows users to exchange their non-fungible tokens.
Kota Chin, Keita Emura, Kazumasa Omote, Shingo Sato
In an open-bid auction, a bidder can know the budgets of other bidders. Thus, a sealed-bid auction that hides bidding prices is desirable. However, in previous sealed-bid auction protocols, it has been difficult to provide a ``fund binding'' property, which would guarantee that a bidder has funds more than or equal to the bidding price and that the funds are forcibly withdrawn when the bidder wins. Thus, such protocols are vulnerable to false bidding. As a solution, many protocols employ a simple deposit method in which each bidder sends a deposit to a smart contract, which is greater than or equal to the bidding price, before the bidding phase. However, this deposit reveals the maximum bidding price, and it is preferable to hide this information. In this paper, we propose a sealed-bid auction protocol that provides a fund binding property. Our protocol not only hides the bidding price and a maximum bidding price, but also provides fund binding, simultaneously. For hiding the maximum bidding price, we pay attention to the fact that usual Ethereum transactions and transactions for sending funds to a one-time address have the same transaction structure, and it seems that they are indistinguishable. We discuss how much bidding transactions are hidden. We also employ DECO (Zhang et al,. CCS 2020) that proves the validity of the data to a verifier in which the data are taken from a source without showing the data itself. Finally, we give our implementation which shows transaction fees required and compare it to a sealed-bid auction protocol employing the simple deposit method.
Distributed ledger technology (DLT) is a disruptive technology with the potential to reengineer the entire trading cycle by alleviating inefficiencies such as time lags, multiple record keeping, human errors, and transparency common with the traditional trade cycle. This study evaluates the potential benefits of DLT in mitigating information asymmetry in trading relationships and how a DLT model can be deployed to revamp the trading process. We find that information friction results from differences in stakeholder preferences by identifying and categorizing information friction into 4 groups through a review of key studies in leading management journals. This finding aligns with conclusions reached in scientific research that the benefits of DLT prevail in markets with imperfect information. In addition, we illustrate the potential benefits of DLT in mitigating inefficiencies in trading relationships resulting from information asymmetry. The article concludes with a word of caution for potential users to take gradual steps of adoption to keep pace with changing technology so as not to become laggards.
This article examines the implications of Distributed Ledger Technology (a.k.a. blockchain) for several areas of law. While cryptocurrencies have received much attention, the implications of DLT are potentially far reaching. DLT raises interesting and important questions relating to rules of evidence, surrounding issues like hearsay and authentication. The advent of initial coin offerings has implications not only for how firms are financed but also for securities law in regulating such offerings. Cryptocurrencies themselves (e.g., Bitcoin) have raised serious issues for tax avoidance and taxation law. Relatedly, the rise of cryptocurrencies raises issues regarding the relationship between private and nationally issued currencies, and even the role and efficacy of monetary policy. Finally, DLT has practical implications for election law and voter turnout, with such technology already begun to be used for security purposes in online voting and permitted in 32 US states.
Smart contracts provide the means to stipulate rules of interaction between mutually distrustful organizations. They encode contractual agreements on the basis of source code, which else need to be contractualized in natural language. While the mediation of contractual agreements via smart contracts is seamless in theory, it requires that the conditions of an interaction are accurately made available in the blockchain. Time is a prominent such condition. In the paper at hand, we empirically measure the consistency of a smart contract to yield equal results on the basis of the time of an interaction and its potentially inaccurate representation in the blockchain. We propose a novel metric called execution accuracy to measure this consistency. We specifically measure the execution accuracy of a time intervalconstrained smart contract that executes distinct logic within and without some constraint interval. We run experiments for the local Ganache and Quorum and the public Görli and Rinkeby Ethereum blockchains. Our experiments confirm our intuition that execution accuracy decreases near interval bounds. The novelty of our proposed metric resides in its capacity to quantify this decrease. We demonstrate how time constraints can be effectively stipulated on the basis of execution accuracy measurements.
Ensuring functional correctness of smart contracts is a pressing security concern to blockchain-based systems. With the development of blockchain application, the trading scenarios and function implementation of smart contracts have become increasing complex, containing several interacted contracts or related functions. However, the existing contracts verifiers for proving functional correctness focus on verifying isolated contract or function but ignore the interactions between them, which makes it difficult to verify correctness of composite transactions, i.e., complex transaction scenarios that invoke multiple contracts or trigger a set of transactions. In this paper, we present SMIFIER, a formal verification tool for smart contracts to prove functional properties in composite transactions. SMIFIER defines a set of specifications for composite transactions and can automatically specify properties in these multiple complex transactions. Based on states extraction and mapping, SMIFIER translates annotated Solidity program into Boogie program and verifies relations between functions and properties for interacted contracts. Our experimental evaluation on 12 real-world projects and 65 properties, demonstrates that SMIFIER is practically effective in ensuring functional correctness of properties in composite transactions.
Decentralized autonomous organizations (DAOs) are blockchain-based organizations fed by a peer-to-peer (P2P) network of contributors. Their management is decentralized without top executive teams and built on automated rules encoded in smart contracts, and their governance works autonomously based on a combination of on-chain and off-chain mechanisms that support community decision-making. A growing body of literature has emerged exploring DAOs. However, there is a considerable lack of clarity about this organizational design and its theoretical conceptualization. To this end, we undertake an integrative literature review that reveals three main principles—decentralized, automated and autonomous organizations—and the following four theoretical perspectives mainly adopted to examine this novel organizational form: transaction cost theory, institutions for collective action, agency theory, and socio-materiality. By extending these theories, we propose an integrative model of DAO for research and theory building. Our contribution provides conceptual clarity and proposes a framework for future research directions.