Ayelet Lotem, Sarah Azouvi, Patrick McCorry, Aviv Zohar
Many prominent smart-contract applications such as payment channels, auctions, and voting systems often involve a mechanism in which some party must respond to a challenge or appeal some action within a fixed time limit. This pattern of challenge-response mechanisms poses great risks if during periods of high transaction volume, the network becomes congested. In this case fee market competition can prevent the inclusion of the response in blocks, causing great harm. As a result, responders are allowed long periods to submit their response and overpay in fees. To overcome these problems and improve challenge-response protocols, we suggest a secure mechanism that detects congestion in blocks and adjusts the deadline of the response accordingly. The responder is thus guaranteed a deadline extension should congestion arise. We lay theoretical foundations for congestion signals in blockchains and then proceed to analyze and discuss possible attacks on the mechanism and evaluate its robustness. Our results show that in Ethereum, using short response deadlines as low as 3 hours, the protocol has >99% defense rate from attacks even by miners with up to 33% of the computational power. Using shorter deadlines such as one hour is also possible with a similar defense rate for attackers with up to 27% of the power.
The conventional wisdom is that you must reveal something about how you pick stocks in order to prove that you have stock-picking skill. In this paper I show that, prior to executing any trades, it is possible to prove you have stock-picking skill without revealing any additional information about your underlying trading signal. Here is how the protocol works. The evaluator presents you with a sequence of paired return data sets, one real and the other suitably randomized. A profitable trading signal will only be able to predict the cross-section of returns in the real data set. So by repeatedly using your trading signal to identify the real data set, you can prove that you have stock-picking skill without revealing anything else about your underlying signal. This protocol represents a zero-knowledge proof of stock-picking skill—i.e., a proof which reveals nothing except for the validity of your claim. Zero-knowledge proofs allow any skilled stock picker to advertise his ability without fear of his trading signal getting scooped. As a result, they have important implications for how the active-management industry is organized.
We propose and study a new class of polynomial voting rules for a general decentralized decision/consensus system, and more specifically for the proof-of-stake protocol. The main idea, inspired by the Penrose square-root law and the more recent quadratic voting rule, is to differentiate a voter’s voting power and the voter’s share (fraction of the total in the system). We show that, whereas voter shares form a martingale process that converges to a Dirichlet distribution, their voting powers follow a supermartingale process that decays to zero over time. This prevents any voter from controlling the voting process and, thus, enhances security. For both limiting results, we also provide explicit rates of convergence. When the initial total volume of votes (or stakes) is large, we show a phase transition in share stability (or the lack thereof), corresponding to the voter’s initial share relative to the total. We also study the scenario in which trading (of votes/stakes) among the voters is allowed and quantify the level of risk sensitivity (or risk aversion) in three categories, corresponding to the voter’s utility being a supermartingale, a submartingale, and a martingale. For each category, we identify the voter’s best strategy in terms of participation and trading. Funding: W. Tang gratefully acknowledges financial support through the National Science Foundation [Grants DMS-2113779 and DMS-2206038] and through a start-up grant at Columbia University. D. D. Yao’s work is part of a Columbia–City University/Hong Kong collaborative project that is supported by InnoHK Initiative, the Government of Hong Kong Special Administrative Region, and the Laboratory for AI-Powered Financial Technologies.
Brett Hemenway, Bin Gu, Gerry Tsoukalas, Niuniu Zhang
Non-Fungible Tokens (NFTs) are transforming how content creators, such as artists, price and sell their work. A key feature of NFTs is the inclusion of royalties, which grant creators a share of all future resale proceeds. Although widely used, critics argue that sophisticated speculators, who dominate NFT markets, simply price in royalties upfront, neutralizing their impact. We show this intuition holds only under perfect, frictionless markets. Under more realistic market conditions, royalties enable creators to capitalize on the presence of speculators in at least three ways: They can enable risk sharing (under risk aversion), mitigate information asymmetry (when speculators are better informed), and unlock price discrimination benefits (in multi-unit settings). Moreover, in all three cases, royalties meaningfully expand trade, implying increased transaction volume for platforms. These results offer testable predictions that can guide both empirical research and platform design.
Blockchain consensus is a state whereby each node in a network agrees on the current state of the blockchain. Existing protocols achieve consensus via a contest or voting procedure to select one node as a dictator to propose new blocks. However, this procedure can still lead to potential attacks that make consensus harder to achieve or lead to coordination issues if multiple, competing chains (i.e., forks) are created with the potential that an untruthful fork might be selected. We explore the potential for mechanisms to be used to achieve consensus that are triggered when there is a dispute impeding consensus. Using the feature that nodes stake tokens in proof of stake (POS) protocols, we construct revelation mechanisms in which the unique (subgame perfect) equilibrium involves validating nodes propose truthful blocks using only the information that exists amongst all nodes. We construct operationally and computationally simple mechanisms under both Byzantine Fault Tolerance and a Longest Chain Rule, and discuss their robustness to attacks. Our perspective is that the use of simple mechanisms is an unexplored area of blockchain consensus and has the potential to mitigate known trade-offs and enhance scalability.
Lin William Cong, Xiang Hui, Catherine E. Tucker, Luofeng Zhou
Blockchain-based smart contracts can potentially replace certain traditional contracts through decentralized enforcement and reduced transaction costs. However, scalability is a key bottleneck hindering their broader application and adoption, often leading to concentrated or exclusive networks. To avoid falling short of the original promise of the technology, firms actively explore “layer-2” methods for scaling. We provide some initial evidence on the economic implications of a layer-2 scaling solution, which moves information aggregation from on-chain to off-chain peer-to-peer networks. A parallel-system experiment allows clean identification because we observe the same unit in the treatment and control systems at the same time. We find that this scaling solution reduces operating costs by 76%, and importantly, leads to decentralization with lower market concentration and more participation, which in turn improves data accuracy. The findings provide insights on how blockchain and smart contracting technologies evolve toward achieving decentralized and scalable trust. This paper was accepted by David Simchi-Levi, information systems. Funding: W. Cong received funding from Ripple’s university blockchain research initiative (UBRI). Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.00281 .
Decentralized Finance (DeFi) is an emerging financial service model based on blockchain technology. DeFi composability denotes the ability for different DeFi services to interact with one another resulting in new forms of financial services. The DeFi ecosystem is largely based on ERC-20 tokens that can represent the value of an asset. Collateralized assets in DeFi composability are locked and additional profit cannot be generated. In this paper, we propose a method to generate profit from locked assets by using ERC-721 Non-Fungible Tokens (NFTs) and perpetual contracts. NFT represents the rights to a certain asset. A perpetual contract is a futures contract that does not have an expiration date. We propose perpetual contract NFT, a new form of NFT that can be used as collateral, which exploits perpetual futures contracts in the cryptocurrency derivatives market. Collateral needs to be provided to back the value of a perpetual contract. If the perpetual contract is minted as NFT, the resulting NFT represents the rights to the perpetual contract and its collateral. Therefore, the perpetual contact NFT itself can be used as collateral for DeFi composability. A proof-of-concept smart contract and a web application for perpetual contract NFT are provided to demonstrate its functionality. To validate the profitability of the perpetual contract NFT using a real-world scenario, we experiment with the position NFT of Uniswap v3 decentralized exchange. The position NFT is a form of perpetual contract NFT. Specifically, we present validation with three types of pools: stablecoins, stablecoin/wrapped tokens pair, and wrapped tokens.
The Non-Fungible Token (NFT) is viewed as one of the important applications of blockchain technology. Although NFT has a large market scale and multiple practical standards, several limitations of the existing mechanism in NFT markets exist. This work proposes a novel securitization and repurchase scheme for NFT to overcome these limitations. We first provide an Asset-Backed Securities (ABS) solution to settle the limitations of non-fungibility of NFT. Our securitization design aims to enhance the liquidity of NFTs and enable Oracles and Automatic Market Makers (AMMs) for NFTs. Then we propose a novel repurchase protocol for a participant owing a portion of NFT to repurchase other shares to obtain the complete ownership. As participants may strategically bid during the acquisition process, our repurchase process is formulated as a Stackelberg game to explore the equilibrium prices. We also provide solutions to handle difficulties at market such as budget constraints and lazy bidders.
Christoph Müller-Bloch, Jonas Valbjørn Andersen, Jason Spasovski, Jungpil Hahn
Blockchain systems allow for securely keeping shared records of transactions in a decentralized 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, decentralized decision-making power is not an inherent feature of blockchain systems, but a technological possibility. Numerous security incidents illustrate that decentralized control cannot be taken for granted. We therefore study how key parameters affect the degree of decentralization 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 decentralization. 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 decentralization. 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 decentralization in information systems research, and contributes to understanding the governance mechanisms that lead to decentralization in proof-of-stake blockchain systems as well as to designing proof-of-stake blockchain systems that are prone to decentralization and therefore more secure.
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.
This paper examines the efficiency of the Initial Coin Offering (ICO) market through a search- theoretical lens. Search intensity associated with the process of identifying valuable startups is increasing in market granularity. Blockchain technology increases market granularity because asset tokenization lowers entry barriers. Lower-end entrants, however, increase aggregate search intensity but may lack search skills. The resulting search-related inefficiency creates a niche for intermediaries or institutional investors that specialize on search. Consistent with the theory, specialized crypto funds increase ICO market efficiency by reducing search frictions, inter alia, by shortening the time-to-funding and increasing the funding amount. At the same time, crypto funds extract sizable economic rents for their intermediation services. Overall, the study relates to the general trade-off between centralization and decentralization in entrepreneurial finance. It suggests that market frictions specific to early-stage crowdfunding of entrepreneurship may prevent “perfectly” Decentralized Finance (DeFi) markets from functioning efficiently.
The majority of NFTs utilize the Ethereum blockchain platform to facilitate smart contracts. In this paper, we execute various econometric analyses to determine if this technical dependence induces a financial linkage to the risk, return, and prices of assets. For robustness, we also test the same relation between Bitcoin and NFTs. Empirical analyses are conducted through SADF bubbles test, DCC-GARCH time-varying correlation analysis, Bootstrap causality tests and spillover analysis. According to the results of various price, return, and volatility analyses, we find that NFTs do not demonstrate idiosyncratic features in their price developments and thus they cannot be considered as a separate asset class. Additionally, NFTs do not possess a specific financial linkage with Ethereum from using its infrastructure. Finally, we suggest NFT investors use alternative financial instruments, rather than Ether and Bitcoin in portfolio diversification, due to the presence of significant time-varying relationships and interactions.
Muhammad Muneeb, Zeeshan Raza, Irfan Ul Haq, Omair Shafiq
A smart contract is known to be useful for automating business processes triggered by specific events caused by IoT sensors, data feeds, or other applications. A blockchain-based smart contract management system is an innovative technology that is foreseen to automate future business-to-business (B2B) processes. Blockchain is well-known to play a central role in business process re-engineering by optimizing business workflow operations, especially in multi-party arrangements. This paper presents a multi-organizational smart contract management system in which a user can create, deploy, and execute smart contracts. This paper consists of two parts; in the first part, we have compared existing smart contract management systems based on different characteristics that can play a vital role in selecting a particular system for a specific business need. In the second part, while utilizing and building upon the state-of-the-art techniques, we have built a framework for a blockchain-based smart contract and transaction management system. It is a unified architecture supporting DAO (Decentralized Autonomous Organizations) and organizational level blockchain-based smart contract execution. There are two types of separate blockchains utilized in the proposed framework, i.e., SBlockchain and TBlockchain. SBlockchain is used to store smart contracts, whereas all the data generated by the smart contracts is stored inside the TBlockchain. In addition, each smart contract has some terms and clauses necessary for some event execution. Various components of the framework and their implementation have been described in detail with the help of relevant use-cases.
Comprendre la consommation énergétique des blockchains : un regard sur les contrats intelligents Les systèmes de chaînes de blocs sont des registres répliqués dans un réseau pair à pair. Elles ont connu un développement rapide depuis quelques années en s'illustrant dans de nombreux domaines d'activités. En permettant le traitement et la sauvegarde de données dans un contexte distribué et Byzantin, ces technologies ont le potentiel de modifier de nombreux secteurs. Par exemple, dans le cadre de la finance décentralisée, les cryptomonnaies se développement comme une alternative aux monnaies fiduciaires en proposant un système de paiement dépourvu de tiers de confiance. Cependant, une certaine inquiétude vis-à-vis de l’impact environnemental des chaînes de blocs a émergé en parallèle de leur développement. En particulier, de nombreuses recherches ont démontré le coût énergétique important des chaînes basées sur les preuves de travail. Dans cette thèse, nous proposons de contribuer à l'étude expérimentale du coût énergétique des solutions logicielles basées sur les chaînes de blocs. Face à l'enrichissement progressif de l'écosystème lié aux chaînes de blocs, nous proposons BCTMark, un nouvel outil de déploiement et d'évaluation des performances des chaînes de blocs. Partant de cet outil, nous concentrons notre étude sur l'impact des contrats intelligents sur la chaîne de blocs Ethereum. D'une part, nous proposons un modèle pour l'estimation du coût énergétique des contrats intelligents développé pour Ethereum. D'autre part, nous proposons un nouveau protocole pour l'identification et l'élimination des contrats non utilisés dans le but de proposer des chaînes de blocs plus frugales en calculs et espaces de stockages.
Darcy W E Allen, Chris Berg, Sinclair Davidson, Jason Potts
Knowledge about property rights is a commons that facilitates market exchange and economic coordination. The governance of that shared knowledge resource—the various formal and informal rules that maintain ledgers of property rights—ranges from community norms to formal state registries. In this chapter we make three contributions. First, we use the lens of knowledge commons theory to argue that knowledge about property rights is a shared resource. Second, we explore how that knowledge commons is governed—particularly relating to “rules in use”—might shift due to technological advances in distributed ledgers. Third, we argue that as blockchain augments and complements existing governance structures, it creates a more robust political economy.
As Machine Learning (ML) models are becoming increasingly complex, one of the central challenges is their deployment at scale, such that companies and organizations can create value through Artificial Intelligence (AI). An emerging paradigm in ML is a federated approach where the learning model is delivered to a group of heterogeneous agents partially, allowing agents to train the model locally with their own data. However, the problem of valuation of models, as well the questions of incentives for collaborative training and trading of data/models, have received limited treatment in the literature. In this paper, a new ecosystem of ML model trading over a trusted Blockchain-based network is proposed. The buyer can acquire the model of interest from the ML market, and interested sellers spend local computations on their data to enhance that model's quality. In doing so, the proportional relation between the local data and the quality of trained models is considered, and the valuations of seller's data in training the models are estimated through the distributed Data Shapley Value (DSV). At the same time, the trustworthiness of the entire trading process is provided by the distributed Ledger Technology (DLT). Extensive experimental evaluation of the proposed approach shows a competitive run-time performance, with a 15\% drop in the cost of execution, and fairness in terms of incentives for the participants.
Abstract Double auction mechanisms have been designed to trade a variety of divisible resources (e.g., electricity, mobile data, and cloud resources) among distributed agents. In such divisible double auction, all the agents (both buyers and sellers) are expected to submit their bid profiles, and dynamically achieve the best responses. In practice, these agents may not trust each other without a market mediator. Fortunately, smart contract is extensively used to ensure digital agreement among mutually distrustful agents. The consensus protocol helps the smart contract execution on the blockchain to ensure strong integrity and availability. However, severe privacy risks would emerge in the divisible double auction since all the agents should disclose their sensitive data such as the bid profiles (i.e., bid amount and prices in different iterations) to other agents for resource allocation and such data are replicated on all the nodes in the network. Furthermore, the consensus requirements will bring a huge burden for the blockchain, which impacts the overall performance. To address these concerns, we propose a hybridized TEE-Blockchain system (system and auction mechanism co-design) to privately execute the divisible double auction. The designed hybridized system ensures privacy, honesty and high efficiency among distributed agents. The bid profiles are sealed for optimally allocating divisible resources while ensuring truthfulness with a Nash Equilibrium. Finally, we conduct experiments and empirical studies to validate the system and auction performance using two real-world applications.
In blockchains such as Bitcoin and Ethereum, users compete in a transaction fee auction to get their transactions confirmed in the next block. A line of recent works set forth the desiderata for a "dream" transaction fee mechanism (TFM), and explored whether such a mechanism existed. A dream TFM should satisfy 1) user incentive compatibility (UIC), i.e., truthful bidding should be a user's dominant strategy; 2) miner incentive compatibility (MIC), i.e., the miner's dominant strategy is to faithfully implement the prescribed mechanism; and 3) miner-user side contract proofness (SCP), i.e., no coalition of the miner and one or more user(s) can increase their joint utility by deviating from the honest behavior. The weakest form of SCP is called 1-SCP, where we only aim to provide resilience against the collusion of the miner and a single user. Sadly, despite the various attempts, to the best of knowledge, no existing mechanism can satisfy all three properties in all situations. Since the TFM departs from classical mechanism design in modeling and assumptions, to date, our understanding of the design space is relatively little. In this paper, we further unravel the mathematical structure of transaction fee mechanism design by proving the following results: - Can we have a dream TFM? - Rethinking the incentive compatibility notions. - Do the new design elements make a difference?
When users deploy or invoke smart contracts on Ethereum, a fee is charged for avoiding resource abuse. Metered in gas, the fee is the product of the amount of gas used and the gas price. The more gas used indicates a higher transaction fee. In my doctoral research, we aim to investigate two widely studied issues regarding gas, i.e., gas estimation and gas optimization. The former is to predict gas costs for executing a transactions to avoid out-of-gas exceptions, and the latter is to modify existing contracts to save transaction fee. We target some problems that previous work did not solve: gas estimation for loop functions, and gas optimization for storage usage and arrays. We expect that my research can help Ethereum users avoid economical loss for out-of-gas exceptions and pay less transaction fee.