As decentralized money market protocols continue to grow in value locked, there have been a number of optimizations proposed for improving capital efficiency. One set of proposals from Euler Finance and Mars Protocol is to have an interest rate curve that is a proportional-integral-derivative (PID) controller. In this paper, we demonstrate attacks on proportional and proportional-integral controlled interest rate curves. The attack allows one to manipulate the interest rate curve to take a higher proportion of the earned yield than their pro-rata share of the lending pool. We conclude with an argument that PID interest rate curves can actually \emph{reduce} capital efficiency (due to attack mitigations) unless supply and demand elasticity to rate changes are sufficiently high.
Ze Chen, Ruichao Jiang, Javad Tavakoli, Yiqiang Q. Zhao
In this article we show that Theorem 2 in Lie et al. (2023) is incorrect. Since Wombat Exchange, a decentralized exchange, is built upon Lie et al. (2023) and Theorem 2 is fundamental to Wombat Finance, we show that an undesirable phenomenon, which we call the robbed withdrawal, can happen as a consequence.
Abstract This paper studies the optimal stopping problem under the large‐population framework. In particular, two classes of optimal stopping problems are formulated by taking into account the relative performance criteria . It is remarkable that the relative performance criteria, also understood by the Joneses preference , habit formation utility , or relative wealth concern in economics and finance, play an important role in explaining various decision behaviors such as price bubbles. By introducing such criteria in large‐population setting, a given agent can compare his individual stopping rule with the average behaviors of its cohort. The associated mean‐field games are formulated in order to derive the decentralized stopping rules. The related consistency conditions are characterized via some coupled equation system and the ‐Nash equilibrium properties are also verified. In addition, some inverse mean‐field optimal stopping problem is also introduced and discussed.
The article analyzes the correspondence of the emergence of cryptocurrencies to two important theoretical ideas of the Austrian school of economics - the regression theorem of L. von Mises and the concept of denationalization of money by F. Hayek. The analysis shows the consistency of the new economic phenomenon with the regression theorem, since the posses-sion of bitcoin as an asset confirms the presence of some value before being used as a medi-um of exchange. Cryptocurrency competition is similar to the ideas of F. Hayek, but takes place in the conditions of maintaining the state monopoly on emission. At the same time, the commodity security of stablecoins corresponds to the commodity security of private currencies.
Bitcoin was created as a way for people to send money over the internet. The digital currency was intended to provide an alternative payment system that would operate free of central control but otherwise be used just like traditional currencies. Are bitcoins safe?
Bitcoin was created as a way for people to send money over the internet. The digital currency was intended to provide an alternative payment system that would operate free of central control but otherwise be used just like traditional currencies. Are bitcoins safe?
<p>The popularity of cryptocurrencies has grown significantly in recent years, and they have become an important asset for internet trading. One of the main drawbacks of cryptocurrencies is the high volatility and fluctuation in value. The value of cryptocurrencies can change rapidly and dramatically, making them a risky investment. Cryptocurrencies are largely unregulated, which can exacerbate their volatility. The high volatility of cryptocurrencies has also led to a speculative bubble, with many investors buying and selling cryptocurrencies based on short-term price fluctuations rather than their underlying values. Therefore, how to reduce the fluctuation risk introduced by exchanges, transform uncertain prices to deterministic value, and promote the benefits of decentralized finance are critical for the future development of cryptos and Web 3.0. </p> <p>To address the issues, this paper proposes a novel theory as Automatic Increase Market Systems (AIMS) for cryptos, which could potentially be designed to automatically adjust the value of a cryptocurrency helping to stabilize the price and increase its value over time in a deterministic manner. We build a crypto, WISH (https://wishbank.wtf), based on AIMS in order to demonstrate how the automatic increase market system would work in practice, and how it would influence the supply of the cryptocurrency in response to market demand and finally make itself to be a stable medium of exchange, ensuring that the AIMS is fair and transparent.</p>
Jason Milionis, Ciamac C. Moallemi, Tim Roughgarden
In decentralized finance ("DeFi"), automated market makers (AMMs) enable traders to programmatically exchange one asset for another. Such trades are enabled by the assets deposited by liquidity providers (LPs). The goal of this paper is to characterize and interpret the optimal (i.e., profit-maximizing) strategy of a monopolist liquidity provider, as a function of that LP's beliefs about asset prices and trader behavior. We introduce a general framework for reasoning about AMMs based on a Bayesian-like belief inference framework, where LPs maintain an asset price estimate. In this model, the market maker (i.e., LP) chooses a demand curve that specifies the quantity of a risky asset to be held at each dollar price. Traders arrive sequentially and submit a price bid that can be interpreted as their estimate of the risky asset price; the AMM responds to this submitted bid with an allocation of the risky asset to the trader, a payment that the trader must pay, and a revised internal estimate for the true asset price. We define an incentive-compatible (IC) AMM as one in which a trader's optimal strategy is to submit its true estimate of the asset price, and characterize the IC AMMs as those with downward-sloping demand curves and payments defined by a formula familiar from Myerson's optimal auction theory. We generalize Myerson's virtual values, and characterize the profit-maximizing IC AMM. The optimal demand curve generally has a jump that can be interpreted as a "bid-ask spread," which we show is caused by a combination of adverse selection risk (dominant when the degree of information asymmetry is large) and monopoly pricing (dominant when asymmetry is small). This work opens up new research directions into the study of automated exchange mechanisms from the lens of optimal auction theory and iterative belief inference, using tools of theoretical computer science in a novel way.
Carlos Alberto Durigan, Fernando José Barbin Laurindo
Cryptocurrency can be understood as a digital asset transacted among participants in the crypto economy. Every cryptocurrency must have an associated Blockchain. Blockchain is a Distributed Ledger Technology (DLT) which supports cryptocurrencies, this may be considered as the most promising disruptive technology in the industry 4.0 context. Decentralized finance (DeFi) is a Blockchain-based financial infrastructure, the term generally refers to an open, permissionless, and highly interoperable protocol stack built on public smart contract platforms, such as the Ethereum Blockchain. It replicates existing financial services in a more open and transparent way. DeFi does not rely on intermediaries and centralized institutions. Instead, it is based on open protocols and decentralized applications (Dapps). Considering that there are many digital coins, stablecoins and central bank digital currencies (CBDCs), these currencies should interact among each other sometime. For this interaction the Information Technology elements play an important whole as enablers and IT strategic alignment. This paper considers the strategic alignment model proposed by Henderson and Venkatraman (1993) and Luftman (1996). This paper seeks to answer two main questions 1) What are the common IT elements in the DeFi? And 2) How the elements connect to the IT strategic alignment in DeFi? Through a Systematic Literature Review (SLR). Results point out that there are many IT elements already mentioned by literature, however there is a lack in the literature about the connection between IT elements and IT strategic alignment in a Decentralized Finance (DeFi) architectural network. After final considerations, limitations and future research agenda are presented. Keywords: IT Strategic alignment, Decentralized Finance (DeFi), Cryptocurrency, Digital Economy.
Abstract In recent years, the use of cryptocurrencies has increased. As these currencies continue to play a larger role, they eventually will be an important component of banking system activity. Moreover, in addition to the standard role of financial intermediaries to facilitate lending, intermediaries can be valuable firms that help provide safekeeping of tokens. The objective of this paper is to demonstrate these important functions in a microfounded model of monetary exchange. Furthermore, we also consider the possibility that central banks issue their own digital currencies that may affect the level of intermediation in the private banking system.
Oana Oprişan, Ana Maria Barzecu, Ana-Maria Dumitrache Șerbănescu
This paper, entitled "Cryptocurrency Trading", is a research study covering theoretical and practical notions about cryptocurrencies and their trading in financial markets.We chose this topic because cryptocurrencies and the technology behind them have revolutionised the financial sector and even now, after a period of time since their emergence and a period of time in which they have been used, cryptocurrencies raise some questions.The main objective of this paper is to show that, in the financial markets, cryptocurrencies are assets that promise a high return, i.e. a good short-term investment.The specific objectives have been highlighted by elaborating a study presenting the ways in which cryptocurrencies are traded in the financial markets and by conducting an analysis on them.The aim of this paper is to show that cryptocurrencies Bitcoin,Ethereum and ADA are the most popular and show functionality and market capitalization.
The objective is to study how bitcoin should be used in dollarized economies and how bitcoin is distributed to people according to their life deeds. The bitcoin contradicts all the Keynesian Economic Theory whereas bitcoin increases, its prices increase too, and this is different from the normal theory. How and why bitcoin has been built and the new universal technological techniques behind bitcoin.
Cryptocurrencies have made the headlines in mainstream news in the recent years. There are people who become rich in a matter of a few weeks as well as those who lose a fortune with Cryptocurrency. High Cryptocurrency price volatility has been witnessed as influential people and governments take turns fueling both the ups and downs. Prices rise when influential investors or persons express support for Cryptocurrencies while prices fall sharply when there are news regarding Cryptocurrency frauds and scams. Governments everywhere are still trying to find the right balance between control and leniency of Cryptocurrency adoption despite its long years of existence. In this paper, we attempt to develop a simple theoretical model to study the rational bubbles in the Cryptocurrency. In the model, two highlighted features of the Cryptocurrency are (1) an asset with fixed positive supply and (2) an asset traded internationally with infinitesimal transaction cost. We strikingly find that oscillatory bubbly equilibrium dynamic is common over a wide range of parametrization; for example, large income inequality across countries. In other words, the Cryptocurrency is highly volatile by its very own nature. Cryptocurrencies may increase welfare for agents in economies with certain parameters such as those with low relative risk aversion or high output elasticity of capital. It is a vector that can easily transfer shocks from one country to another through means of its price change alone or through means of propagated risk perception. We found an interesting insight that differentiates Cryptocurrencies from normal country restricted bubbles. When a shock happens to a Cryptocurrency anywhere, no matter how small or insignificant the economy of the source of the shock may be, a larger impact can ripple through other economies which are much bigger than the source country. This characteristic makes Cryptocurrencies either a hero or villain depending on the different parameters of the world and each economy.
We consider an economy endowed with two rival currencies: Dollar and Bitcoin, both of which inherently carry no value at all. While the Dollar is maintained by the U.S. Fed with target inflation, the supply in Bitcoin tapers to zero over time. We present a model with underlying pricing equations that a submartingale prevails on Bitcoin prices. Hence, Bitcoin prices appreciate over time. Absence of mutual impatience in Dollars leads to Bitcoin speculation. The main source of Bitcoin appreciation comes from the high inflation in Dollar over that in Bitcoin. We also show Bitcoin speculation and equilibrium to Bitcoin persistence over competing with Dollars.
Digital money era is in full swing. It has already changed the structure of the global monetary system. Like industrial revolutions of the past few centuries, the digital money revolution is based on: (i) new IT and accounting technology (crypto algorithms, distributed ledger technology, internet, and deep penetration of smart phones), and (ii) demand for greater financial inclusion, and for more efficient financial services. The advent of unregulated private mobile money with more than 4 billion users and trillions of dollars in financial transaction has awakened fears of monetary system instability and dwindling traction of the old monetary and fiscal policy. The response has been a relentless effort by more than 100 central banks around the world to develop a public digital currency. Retail CBDCs issued by central banks will be available to everybody to provide stability and liquidity to the financial system in times of need. There will be uncertainties and challenges regarding the conduct of monetary and fiscal policy. Many expected improvements will come with inevitable tradeoffs in the speed and effectiveness of monetary policy transmission, and in achieving greater fiscal transparency without violating individual rights and privacy. Serbia will benefit greatly from improved fiscal transparency and reduced shadow economy associated with digital money revolution. At the same time it will be vulnerable to currency substitution pressures from future digital Euro and reduced traction of monetary policy in the presence of multiple e-money flows. Timely legal preparations for bank-led mobile money and Central Bank digital cash, and applied research of complex future policy risks is strongly advised.
Decentralized finance (Defi) has the potential to be one of the most significant advances in the burgeoning digital economy. It can change financial intermediation, and its applications have the potential to democratize finance by providing a comparable level of competition among economic service and product suppliers. It aims to change the present centralized global financial infrastructure by proposing an internet-based decentralized approach based on open-source protocols rather than traditional financial mediators. Defi applications aim to provide traditional financial services, also known as Centralized Finance, in complete epicondyles, global, and transparent manner by embracing the vision of a financial system that operates without any conduits, such as banks, insurance companies, or financial institutions and is solely powered by the power of smart contracts. Defi is anticipated to have a substantial influence on how banks function in the future, with the potential to modify the structure of the whole financial system on a global scale. We will explore how it will disrupt society and the economy.