Blockchain Papers

Takahiro Hattori, Ryo Ishida

No abstract is available for this record.

Gerard Ruiz

Distributed ledger technology (DLT) is one of the latest in a long list of digital technologies, which appear to be heading towards a new industrial revolution. DLT has become very popular with the publication of the Bitcoin Blockchain in 2008. However, when we consider its suitability for dynamic networking environments, such as the Internet of Things, issues like transaction fees, scalability, and offline accessibility have not been resolved. The IOTA Foundation has designed the IOTA protocol, which is the data and value transfer layer for the Machine Economy. IOTA protocol uses an alternative blockless Blockchain which claims to solve the previous problems: the Tangle. This thesis first inquires into the theoretical concepts of both technologies Tangleand Blockchain, to understand them and identify the reasons to be compatible or not with the Internet of Things networking environments. After the analysis, the thesis focuses on the proposed implementation as a solution to address the connectivity issue suffered by the IOTA network. The answer to the problem is the development of a Neighbor Discovery algorithm, which has been designed to fulfill the requirements demanded by the IOTA application. Dealing with IOTA network setup can be very interesting for the community that is looking for new improvements at each release. Testing the solution in a peer-to-peer specific protocol (PeerSim), with different networking scenarios, allowed us to get valuable and more realistic information. Thus, after analyzing the results, we were able to determine the appropriate IOTA network configuration to build a more reliable and long-lasting network.

Gustaf Blidholm, Mathias Johnson

Centralized data storage and reconciliation by trusted intermediaries has historically put financial systems in the hands of a single central parties. The emergence of bitcoin and blockchain, combined with the 2008 financial crisis, has shifted the Swedish financial sector’s traditional perspectives on democratization, centralization, transparency and automation. Trade and export finance is one of many sectors investigating how blockchain and distributed ledger technology can be used other than as a digital currency system. Swedish trade and export finance connects importers, exporters, banks, credit providers, customs, and transporters into a fragmented and complex process with many stakeholders. Sweden further has a history of quickly adopting technological innovations. Banks therefore face a dynamic environment and an inconsistent, manual operative process that removes profitability incentives in providing small enterprises with credit. The adoption of DLT could provide efficiency gains and cost savings in administration, communication, reconciliation and accounting. In this thesis, the costs, benefits, and remaining barriers of implementing distributed ledger technology in Swedish trade finance are identified. Further, Swedish contextual factors’ effect on the rate of adoption is addressed. The chosen methodology of deep interviews and thorough studying of literature provides an assessment of the potential transition dynamics, forming a foundation for future investment decisions. The conclusions drawn suggest that the main costs related to adoption lie in research and development and implementation. R&D costs for distributed ledgers in the Swedish financial sector during 2019 were approximated to USD 40 million. The main benefits of automation, efficiency and reduced level of complexity were concluded to likely outweigh the costs within approximately ten to twenty years. Experience will allow companies to optimize governance structures and consensus mechanisms, while learning to expose parts of networks into public space. The innovative, adaptive Swedish market environment presumably enables faster than average diffusion of innovation, while remaining barriers in cooperation, trust, interoperability and regulation may extend the adoption process

Yunhua He, Hong Li, Xiuzhen Cheng, Yan Liu · 6 authors

In distributed peer-to-peer (P2P) applications, peers self-organize and cooperate to effectively complete certain tasks such as forwarding files, delivering messages, or uploading data. Nevertheless, users are selfish in nature and they may refuse to cooperate due to their concerns on energy and bandwidth consumption. Thus each user should receive a satisfying reward to compensate its resource consumption for cooperation. However, suitable incentive mechanisms that can meet the diverse requirements of users in dynamic and distributed P2P environments are still missing. On the other hand, we observe that Blockchain is a decentralized secure digital ledger of economic transactions that can be programmed to record not just financial transactions and Blockchain-based cryptocurrencies get more and more market capitalization. Therefore in this paper, we propose a Blockchain based truthful incentive mechanism for distributed P2P applications that applies a cryptocurrency such as Bitcoin to incentivize users for cooperation. In this mechanism, users who help with a successful delivery get rewarded. As users and miners in the Blockchain P2P system may exhibit selfish actions or collude with each other, we propose a secure validation method and a pricing strategy, and integrate them into our incentive mechanism. Through a game theoretical analysis and evaluation study, we demonstrate the effectiveness and security strength of our proposed incentive mechanism.

Tim Leung, Hung Cuong Nguyen

Purpose This paper aims to present a methodology for constructing cointegrated portfolios consisting of different cryptocurrencies and examines the performance of a number of trading strategies for the cryptocurrency portfolios. Design/methodology/approach The authors apply a series of statistical methods, including the Johansen test and Engle–Granger test, to derive a linear combination of cryptocurrencies that form a mean-reverting portfolio. Trading systems are designed and different trading strategies with stop-loss constraints are tested and compared according to a set of performance metrics. Findings The paper finds cointegrated portfolios involving four cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH) and Litecoin (LTC), and the corresponding trading strategies are shown to be profitable under different configurations. Originality/value The main contributions of the study are the use of multiple altcoins in addition to bitcoin to construct a cointegrated portfolio, and the detailed comparison of the performance of different trading strategies with and without stop-loss constraints.

Stephen Chan, Jeffrey Chu, Yuanyuan Zhang, Saralees Nadarajah

In financial trading, cryptocurrencies like bitcoin use decentralization, traceability, and anonymity features to perform transactional activities. These digital currencies, using the emerging blockchain technologies, are forming the basis of the largest unregulated markets in the world. This creates various regulatory challenges, including the illicit purchase of drugs and weapons, money laundering, and funding terrorist activities. This chapter analyzes various legal and ethical implications, their effects, and various solutions to overcome the inherent issues that are currently faced by the policymakers and regulators. The authors present the result of an analysis of 30 recently published peer-reviewed scientific publications and suggest various mechanisms that can help in the detection and prevention of illegal activities that currently account for a substantial proportion of cryptocurrency trading. They suggest methods and applications that can also be used to identify the dark marketplaces in the future.

Κωνσταντίνος Γκίλλας, Stelios Bekiros, Costas Siriopoulos

In this paper, we study the contemporaneous tail dependence structure in a pairwise comparison of the ten largest cryptocurrencies, namely Bitcoin, Dash, Dogecoin, Ethereum, Litecoin, Monero, Namecoin, Novacoin, Peercoin, and Ripple. We apply multivariate extreme value theory and we estimate a bias-corrected extreme correlation coefficient. Our findings reveal clear patterns of significantly high bivariate dependency in the distribution tails of some of the most basic and widespread cryptocurrencies, primarily over various downside constraints. This means that extreme correlation is not related to cryptocurrency market volatility per se, but to the trend of the cryptocurrency market. Therefore, extreme correlation increases in bear markets, but not in bull markets for these pairs. Interestingly, there is also a significant number of pairs which exhibit a weak level of dependency in distribution tails.

Sergi Delgado-Segura, Cristina Pérez‐Solà, Jordi Herrera‐Joancomartí, Guillermo Navarro‐Arribas · 5 authors

P2P networks are the mechanism used by cryptocurrencies to disseminate system information while keeping the whole system as much decentralized as possible. Cryptocurrency P2P networks have new characteristics that propose new challenges and avoid some problems of existing P2P networks. By characterizing the most relevant cryptocurrency network, Bitcoin, we provide details on different properties of cryptocurrency networks and their similarities and differences with standard P2P network paradigms. Our study allows us to conclude that cryptocurrency networks present a new paradigm of P2P networks due to the mechanisms they use to achieve high resilience and security. With this new paradigm, interesting research lines can be further developed, both in the focused field of P2P cryptocurrency networks and also when such networks are combined with other distributed scenarios.

Christian Masiak, Joern Block, Tobias Masiak, Matthias Neuenkirch · 5 authors

No abstract is available for this record.

Hoje Jo, Haehean Park, Hersh Shefrin

Abstract Baker and Wurgler identify high sentiment betas with small startup firms that have great growth potential. On the surface, cryptocurrencies share important features in common with high sentiment beta stocks. This paper investigates the degree to which, during the period July 18, 2010–February 26, 2018, the return to bitcoin displayed the characteristics of a high sentiment beta stock. Using a sentiment‐dependent factor model, the analysis indicates that in large measure, bitcoin returns resembled returns to high sentiment beta stocks. Additionally, we show that bitcoin's expected returns are low when sentiment measured by Volatility Index is high while expected returns are high when sentiment is low.

Yi Liu, Xingtong Liu, Chaojing Tang, Jian Wang · 5 authors

Bitcoin combines a peer-to-peer network and cryptographic algorithm to implement a distributed digital currency system, which keeps all transaction history on a public blockchain. Since all transactions recorded on the blockchain are public to everyone, Bitcoin users face a threat of leaking financial privacy. Many analysis and deanonymization approaches have been proposed to link transaction records to real identities. To eliminate this threat, we present an unlinkable coin mixing scheme that allows users to mix their bitcoins without trusting a third party. This mixing scheme employs a primitive known as ring signature with elliptic curve digital signature algorithm (ECDSA) to conceal the transfer of coins between addresses. The mixing server is only able to check whether the output addresses belong to its customers, but it cannot tell which address owned by which customer. Customers do not have to rely on the reputation of a third party to ensure his money will be returned, and his privacy will not be leaked. This scheme needs no modifications on current Bitcoin system and is convenient to deploy by any communities. We implemented a prototype of our scheme and tested it under the Bitcoin core's regtest mode. Security and privacy of our mixing scheme are ensured through the standard ring signature and ECDSA unforgeability.

Cüneyt Gürcan Akçora, Matthew Dixon, Yulia R. Gel, Murat Kantarcıoğlu

A key challenge for Bitcoin cryptocurrency holders, such as startups using ICOs to raise funding, is managing their FX risk. Specifically, a misinformed decision to convert Bitcoin to fiat currency could, by itself, cost USD millions. In contrast to financial exchanges, Blockchain based crypto-currencies expose the entire transaction history to the public. By processing all transactions, we model the network with a high fidelity graph so that it is possible to characterize how the flow of information in the network evolves over time. We demonstrate how this data representation permits a new form of microstructure modeling - with the emphasis on the topological network structures to study the role of users, entities and their interactions in formation and dynamics of crypto-currency investment risk. In particular, we identify certain sub-graphs ('chainlets') that exhibit predictive influence on Bitcoin price and volatility, and characterize the types of chainlets that signify extreme losses.

Sinan Krueckeberg, Peter Scholz

Using tick-level bitcoin data from February 2013 through April 2018, we show substantial arbitrage spreads between global bitcoin markets. Spreads follow multiple consistent patterns. Minimum and maximum prices show significant clustering. Spreads increase during the early hours of a day (according to coordinated universal time), when new exchanges enter markets, and following bitcoin heists and hacks. The full year 2017 and the first quarter of 2018 each had exploitable net arbitrage profit opportunities of at least USD380 million that smart money failed to capture. Based on long-term analyses, we also found that bitcoin market inefficiency has increased over time.

Shaen Corbet, Paraskevi Katsiampa

Non-linearity is characterized by an asymmetric mean-reverting property, which has been found to be inherent in the short-term return dynamics of stocks. In this paper, we explore as to whether cryptocurrency returns, as represented by Bitcoin, exhibit similar asymmetric reverting patterns for minutely, hourly, daily and weekly returns between June 2010 and February 2018. We identify several differences in the behavior of Bitcoin price returns in the pre-and post-$1,000 sub-periods and evidence of asymmetric reverting patterns in the Bitcoin price returns under all the ANAR models employed, regardless of the data frequency considered. We also present evidence indicating stronger reverting behavior of negative price returns in terms of both reverting speed and magnitude compared to positive returns and evidence of positive serial correlation with prior positive price returns. Finally, we also investigated asymmetries in Bitcoin price return series’ persistence by employing higher order ANAR models, finding evidence of a higher persistence of positive returns than negative returns, a result that further supports the existence of asymmetric reverting behavior in the Bitcoin price returns.

Paolo Pagnottoni, Dirk G. Baur, Thomas Dimpfl

Trading of Bitcoin is spread about multiple venues where buying and selling is offered in various currencies. However, all markets trade one common good and by the law of one price, the different prices should not deviate in the long run. In this context we are interested in which platform is the most important one in terms of price discovery. To this end, we use a pairwise approach accounting for a potential impact of exchange rates. The contribution to price discovery is measured by Hasbrouck's and Gonzalo and Granger's information share. We then derive an ordering with respect to the importance of each market which reveals that the Chinese OKCoin platform is the leader in price discovery of Bitcoin, followed by BTC China.

A. J. Walton, Kevin Johnston

Aim/Purpose: This paper explored the factors (enablers and barriers) that affect Bitcoin adoption in South Africa, a Sub-Saharan country with the high potential for Bitcoin adoption. Background: In recent years, Bitcoin has seen a rapid growth as a virtual cryptocurrency throughout the world. Bitcoin is a protocol which allows value to be exchanged over the internet without a central bank or intermediary. Cryptocurrencies such as Bitcoin are technological tools that arguably can contribute to reducing transactions costs. This paper explored the factors that affect Bitcoin adoption in South Africa, a Sub-Saharan country with the high potential for Bitcoin adoption, as little is known about the factors that affect Bitcoin adoption and the barriers to adoption. Methodology: A quantitative questionnaire was distributed to South African virtual communities where Bitcoin is a topic of interest, and 237 quantitative responses were received, along with 212 open-ended comments. Contribution: This research contributes to the body of knowledge in information systems by providing insights into factors that affect Bitcoin adoption in South Africa. It raises awareness of incentives and barriers to Bitcoin adoption at a time when financial literacy is a crucial issue both in South Africa and worldwide. Findings: The results indicate that perceived benefit, attitude towards Bitcoin, subjective norm, and perceived behavioral control directly affected the participants’ intentions to use Bitcoin. Perceived benefit, usefulness, ease of use, and trust-related risk were found to indirectly affect intention to use Bitcoin. Further, it emerges that the barriers to Bitcoin adoption in South Africa consist of the complex nature of Bitcoin and its high degree of volatility. Recommendations for Practitioners: Bitcoin can contribute to reducing transactions costs, but factors that affect adoption and the barriers to adoption should be taken into consideration. These findings can inform systems and software developers to develop applications that make managing Bitcoin keys and transacting using Bitcoin less complex and more intuitive for end users. Recommendation for Researchers: Bitcoin adoption in South Africa is a topic that has not been previously researched. Researchers could research similarities or differences in the various constructs that were used in this research model. Impact on Society: South African Bitcoin users consider it as a universal currency that makes cross-border payments cheaper. A large number of refugees and workers in South Africa make regular payments across borders. Bitcoin could reduce the costs of these transfers. Future Research: Future research could explore Bitcoin (and other cryptocurrencies) adoption in other developing countries. Researchers could look at factors that influence cryptocurrency adoption in general. The factors affecting adoption of other cryptocurrencies can be compared to the results of this study, and similarities and differences can thus be identified.

Kevin Werbach

The blockchain could be the most consequential development in information technology since the Internet. Created to support the Bitcoin digital currency, the blockchain is actually something deeper: a novel solution to the age-old human problem of trust. Its potential is extraordinary. Yet, this approach may not promote trust at all without effective governance. Wholly divorced from legal enforcement, blockchain-based systems may be counterproductive or even dangerous. And they are less insulated from the law’s reach than it seems. The central question is not how to regulate blockchains but how blockchains regulate. They may supplement, complement, or substitute for legal enforcement. Excessive or premature application of rigid legal obligations will stymie innovation and forego opportunities to leverage technology to achieve public policy objectives. Blockchain developers and legal institutions can work together. Each must recognize the unique affordances of the other system.

Shaen Corbet, Charles Larkin, Brian M. Lucey, Larisa Yarovaya

Eastman Kodak is an American technology company that produces imaging products. In 2018, it announced its intentions to enter the crytpocurrency market, raising concerns that it could be taking advantage of a potential cryptocurrency bubble for short-term gains. We analyse the relationships between Kodak, crytocurrency and stock market index returns. We find evidence of a significant, sustained increase in both the share price and price volatility of Kodak after the KODAKCoin announcement, with an increased correlation between the price of Kodak shares and Bitcoin.

Pedro Bação, António Portugal Duarte, Hélder Sebastião, Srdjan Redžepagić

This paper investigates the information transmission between the most important cryptocurrencies -Bitcoin, Litecoin, Ripple, Ethereum and Bitcoin Cash. We use a VAR modelling approach, upon which the Geweke’s feedback measures and generalized impulse response functions are computed. This methodology allows us to fully characterize the direction, intensity and persistence of information flows between cryptocurrencies. At the availabledata granularity, most of information transmission is contemporaneous, that is, it occurs within a day. However, it seems that there are some lagged feedback effects, mainly from other cryptocurrencies to Bitcoin. The generalized impulse-response functions confirm that there is a strong contemporaneous correlation and that there is not much evidence of lagged effects. The exception appears to be related to the overreaction of Bitcoin returns to contemporaneous shocks

Guglielmo Maria Caporale, Alex Plastun

Purpose The purpose of this paper is to examine price overreactions in the case of the following cryptocurrencies: bitcoin, litecoin, ripple and dash. Design/methodology/approach A number of parametric ( t -test, ANOVA, regression analysis with dummy variables) and non-parametric (Mann–Whitney U -test) tests confirm the presence of price patterns after overreactions: the next day price changes in both directions are bigger than after “normal” days. A trading robot approach is then used to establish whether these statistical anomalies can be exploited to generate profits. Findings The results suggest that a strategy based on counter-movements after overreactions is not profitable, whilst one based on inertia appears to be profitable but produces outcomes not statistically different from the random ones. Therefore, the overreactions detected in the cryptocurrency market do not give rise to exploitable profit opportunities (possibly because of transaction costs) and cannot be seen as evidence against the efficient market hypothesis (EMH). Originality/value The overreactions detected in the cryptocurrency market do not give rise to exploitable profit opportunities (possibly because of transaction costs) and cannot be seen as evidence against the EMH.

David Procházka

The invention of blockchain technology has radically changed the perception of how monetary systems can be structured and operated. Central banks and state authorities mostly refuse to acknowledge that cryptocurrencies are money, yet the number of payment transactions using cryptocurrencies is increasing and cryptocurrencies form a non-negligible stake of wealth. As with other economic phenomena, cryptocurrencies shall be addressed in the financial statements of the entities using them, albeit without any accounting guidance in current financial reporting standards. This paper fills this void by suggesting, comparing, and assessing potential accounting models under IFRS. Based on evidence from literature review, as well as recent time-series data on the price volatility of cryptocurrencies, the paper shows that fair value accounting is the most relevant source of useful information for users of financial statements when cryptocurrencies are acquired for investment purposes. Furthermore, the paper identifies scenarios under which cryptocurrencies shall be treated as (foreign) currencies, even though financial system regulators do not consider cryptocurrencies as being money (fiat currency).

Leopoldo Catania, Stefano Grassi, Francesco Ravazzolo

Cryptocurrencies have recently gained a lot of interest from investors, central banks and governments worldwide. The lack of any form of political regulation and their market far from being “efficient”, require new forms of regulation in the near future. From an econometric viewpoint, the process underlying the evolution of the cryptocurrencies’ volatility has been found to exhibit at the same time differences and similarities with other financial time-series, e.g. foreign exchanges returns. This short note focuses on predicting the conditional volatility of the four most traded cryptocurrencies: Bitcoin, Ethereum, Litecoin and Ripple. We investigate the effect of accounting for long memory in the volatility process as well as its asymmetric reaction to past values of the series to predict: 1 day, 1 and 2 weeks volatility levels.

Usman W. Chohan

This discussion paper examines the recent history of cryptocurrency thefts and exchanges shutdowns, focusing specifically on the largest cryptoinstrument: Bitcoin. The examination of thefts and shutdowns are intended to draw academic attention to the accountability deficits that pervade the cryptocurrency space, and the findings of the paper suggest that a much more robust accountability, transparency, and oversight architecture must be put in place vis-a-vis cryptocurrencies.

Nicola Borri, Kirill Shakhnov

Abstract At a given point in time, bitcoin prices are different on exchanges located in different countries, or against different currencies. While existing literature attributes the largest price differences to frictions, like market segmentation, trading platforms advertize how to execute trades based on this information. We provide a novel risk-based explanation of these price differences for a sample containing the most reputable exchanges and after accounting for all transaction costs and limitations to trade. Bitcoin prices for more expensive pairs are riskier because they depreciate more in bad times for cryptocurrency investors, when aggregate liquidity and investor sentiment are lower. (JEL G12, G14, G15, F31).