This paper examines the response of major cryptocurrencies to macroeconomic news announcements (MNA). While other cryptocurrencies exhibit no reaction to major MNA, Bitcoin responds negatively to inflation surprise. Price of Bitcoin decreases by 24 bps in response to a 1 standard deviation inflationary surprise. This reaction is inconsistent with widely-held beliefs of practitioners that Bitcoin can hedge inflation. I do not find support for the hypothesis that the negative response of Bitcoin to inflation is due to its negative exposure to interest rates. Instead, I find support for the hypothesis that Bitcoin is strongly affected by the shift in consumption-savings decisions, driven by the rise in inflation. Consistent with this view, Bitcoin has negative exposure to a proxy for the consumption-savings ratio.
Using transaction data from a large non-fungible token (NFT) trading platform, this paper examines how the behavioral bias of selection-neglect interacts with extrapolative beliefs, accelerating the boom and delaying the crash in the recent NFT bubble.We show that the pricevolume relationship is consistent with extrapolative beliefs about increasing prices which were plausibly triggered by a macroeconomic shock.We test the hypothesis that agents prone to selection-neglect formed even more optimistic beliefs and traded more aggressively than their counterparts during the boom.When liquidity for NFTs declined, observed NFT prices were subject to severe selection bias due in part to seller loss aversion delaying the onset of the crash.Finally, we show that market participants with sophisticated bidding behavior were less subject to selection bias and performed better.
This paper presents a dynamic equilibrium model of Ethereum's macroeconomy. The model captures agents' decisions regarding ETH holdings, staking, and the use of blockspace on both the Ethereum mainnet and Layer 2 networks. The ETH supply evolves according to protocol rules. The model's long-run behavior is characterized analytically, and key properties of the staking share and the price of ETH are derived. The model is calibrated using market data on ETH prices and transaction fees. Alternative issuance curves are evaluated for their effectiveness in managing staking levels.
In response to new developments in financial structure and technology, and galvanized by recent eruptions of volatility, officials from Washington to London to Brussels are grappling with how to regulate the cluster of practices known as decentralized finance, or DeFi. This is a political as well as an economic question. This is to say, the outcome will involve interests in addition to considerations of efficiency. Although advocates of decentralized finance often invoke laudable goals like reduced costs and increased inclusion, it is worth examining what else rides those coattails.
Amit Chaudhary, Roman Kozhan, Ganesh Viswanath-Natraj
This paper studies determinants of interest rates on Decentralized lending protocols. Using transaction level data, we show these protocols are being used to make long or short leveraged positions in the cryptocurrency market. We identify a significant relationship between the interest rate differential and the perpetual futures premium for the ETH/USDT market. However, the link is economically weak, indicating that the speculative beliefs in the two markets are only weakly correlated and that the markets are segmented. Arbitrage across the two markets is ineffective due to wide no-arbitrage bounds, which are governed by high trading costs, gas fees, and price impacts.
Decentralized Finance (‘DeFi’) has gained tremendous momentum over the past three years by using novel approaches to disintermediating financial institutions in the provision of financial services. However, empirical research in this field is still rare, and a more comprehensive understanding of the domain is a missing component in academic research. This paper develops a taxonomy based on a comprehensive literature analysis to structure this emerging field systematically. The taxonomy includes three perspectives (strategy, organization, technology) and seven dimensions (blockchain, value proposition, token type, business process, price mechanism, protocol type, integration type) as well as thirty-six characteristics. The application of the taxonomy to 278 DeFi start-ups reveals that most of the DeFi start-ups focus on Ethereum (36.3%) and have a focus on analytics and automation (52%), while, surprisingly only a few incorporate decentralized governance approaches (3.3%), provide decentralized exchanges (14%) or integrate off-chain data.
Transaction fee markets are essential components of blockchain economies, as they resolve the inherent scarcity in the number of transactions that can be added to each block. In early blockchain protocols, this scarcity was resolved through a first-price auction in which users were forced to guess appropriate bids from recent blockchain data. Ethereum's EIP-1559 fee market reform streamlines this process through the use of a base fee that is increased (or decreased) whenever a block exceeds (or fails to meet) a specified target block size. Previous work has found that the EIP-1559 mechanism may lead to a base fee process that is inherently chaotic, in which case the base fee does not converge to a fixed point even under ideal conditions. However, the impact of this chaotic behavior on the fee market's main design goal -- blocks whose long-term average size equals the target -- has not previously been explored. As our main contribution, we derive near-optimal upper and lower bounds for the time-average block size in the EIP-1559 mechanism despite its possibly chaotic evolution. Our lower bound is equal to the target utilization level whereas our upper bound is approximately 6% higher than optimal. Empirical evidence is shown in great agreement with these theoretical predictions. Specifically, the historical average was approximately 2.9% larger than the target rage under Proof-of-Work and decreased to approximately 2.0% after Ethereum's transition to Proof-of-Stake. We also find that an approximate version of EIP-1559 achieves optimality even in the absence of convergence.
Philippe Bergault, Louis Bertucci, David Bouba, Olivier Guéant
With the emergence of decentralized finance, new trading mechanisms called Automated Market Makers have appeared. The most popular Automated Market Makers are Constant Function Market Makers. They have been studied both theoretically and empirically. In particular, the concept of impermanent loss has emerged and explains part of the profit and loss of liquidity providers in Constant Function Market Makers. In this paper, we propose another mechanism in which price discovery does not solely rely on liquidity takers but also on an external exchange rate or price oracle. We also propose to compare the different mechanisms from the point of view of liquidity providers by using a mean / variance analysis of their profit and loss compared to that of agents holding assets outside of Automated Market Makers. In particular, inspired by Markowitz' modern portfolio theory, we manage to obtain an efficient frontier for the performance of liquidity providers in the idealized case of a perfect oracle. Beyond that idealized case, we show that even when the oracle is lagged and in the presence of adverse selection by liquidity takers and systematic arbitrageurs, optimized oracle-based mechanisms perform better than popular Constant Function Market Makers.
We applied the SVAR-LiNGAM to illustrate the causal relationships between the spot exchange rate, and three crypto-asset exchange rates, Bitcoin, Ethereum, and Ripple. It was notable that the causal order, the EUR_USD spot rate->Bitcoin->Ethereum->Ripple, was obtained by this approach. All the instantaneous effects were strongly positive. Moreover, it was notable that Bitcoin can influence the EUR_USD spot rate positively with a one-day time lag.
Abstract Can currency competition affect central banks’ control of interest rates and prices? Yes, it can. In a two-currency world with competing cash (material or digital), the growth rate of the cryptocurrency sets an upper bound on the nominal interest rate and the attainable inflation rate, if the government currency is to retain its role as medium of exchange. In any case, the government has full control of the inflation rate. With an interest-bearing digital currency, equilibria in which government currency loses medium-of-exchange property are ruled out. This benefit comes at the cost of relinquishing control over the inflation rate.
In this paper we give an elementary analysis of economics of Bitcoin that combines the transaction demand by the consumers and the supply of hashrate by miners. We argue that the decreasing block reward will have no significant effect on the exchange rate (price) of Bitcoin and thus the network will be transitioning to a regime where transaction fees will play a bigger part of miners' revenue. We consider a simple model where consumers demand bitcoins for transactions, but not for hoarding bitcoins, and we analyze market equilibrium where the demand is matched with the hashrate supplied by miners. Our main conclusion is that the exchange rate of Bitcoin cannot be determined from the market equilibrium and so our arguments support the hypothesis that Bitcoin price has no economic fundamentals and is free to fluctuate according to the present demand for hoarding and speculation. We point out that increasing fees bear the risk of Bitcoin being outcompeted by its main rival Ethereum, and that decreasing revenues to miners depreciate the perception of Bitcoin as a medium for store value (hoarding demand) which will have effect its exchange rate.
The creation of distributed ledger technology resulted in the use of secured peer-to-peer interactions that pave way for the invention of Bitcoin and other cryptocurrencies. Since its invention, the price of Bitcoin has exhibited excessive volatility and has attracted increasing attentions. This paper considers the isolated influence of network activities (confirmed payments and users’ adoptions), mining information (network difficulty, Hashrate and transaction fees) and market factors (such as, bitcoin supply and trade volume) as key drivers of Bitcoin price. Using the vector autoregressive model (VECM), the results identified the existence of both long-term equilibrium and short-term dynamic relationship amongst the endogenous system’s variables. The cointegration relation has reversed adjustment effects on the bitcoin return. Accordingly, any deviation from the equilibrium dynamics due to perturbations of network events, market forces and mining data would be minimised. This explains why the Bitcoin price, and by implication its return, continues to experience different massive run-up, spiky protrusions, resistance, reversals, strong supports and consolidations. Based on the finding, the study recommends increased regulatory efforts to curb the excessive fluctuations in Bitcoin price in order to prevent significant loss which could discourage digital investors in the cryptocurrency markets.
Jonathan Chiu, Charles M. Kahn, Thorsten V. Koeppl
Abstract In this viewpoint article, we provide an analysis of the value proposition of decentralized finance (DeFi) and its limitations using a simple stylized model of collateralized lending. DeFi uses a decentralized ledger to run smart contracts that automatically enforce the terms of a lending contract and safeguard the collateral. DeFi can lower the costs associated with intermediated lending and improve financial inclusion. Limitations are the volatility of crypto collateral and stablecoins used for settlement, the possible incompleteness of smart contracts and the lack of a reliable oracle. A proper infrastructure reducing such limitations could improve the value of DeFi.
El dinero es un bien público y, como tal, requiere la ordenación pública del sistema monetario y de pagos a niveles nacional e internacional. Las categorías jurídicas tradicionales —como la moneda de curso legal (legal tender en inglés)— se están adaptando, a veces con dificultad, al espacio digital, puesto que las leyes de los bancos centrales hablan de monedas, billetes y reservas, pero no de monedas digitales, tókenes o tecnología de contabilidad distribuida (distributed ledger technology o DLT). El artículo presenta la tricotomía del dinero digital: criptomonedas, monedas estables (stablecoins) y monedas digitales de los bancos centrales (central bank digital currencies o CBDC), además de considerar la forma en que esta tricotomía reta la noción tradicional de la soberanía monetaria, lo que reaviva el debate entre la teoría estatal del dinero y la teoría social o de mercado del dinero. El artículo examina en particular cuándo, cómo y por qué la digitalización llegó a la banca central, y cómo responden distintas jurisdicciones a la hora de diseñar las CBDC. Finalmente, analiza también aspectos internacionales, al recordar cómo la idea de una moneda global se remonta al Bancor de John Maynard Keynes, y cómo sería posible crear una criptomoneda global que podría circular junto con las criptomonedas nacionales o regionales.
In this paper we analyze dynamic demand elasticity for Bitcoin and Ethereum in terms of price, transaction fees, and energy usage. We find that while both BTC and ETH have significantly positive price elasticities, transaction fee elasticity is negative and positive for BTC and ETH respectively, indicating differences in potential uses for these cryptocurrencies.
Some concepts become economically relevant as new technologies emerge, as is the case with cryptocurrencies in general, or Bitcoin and Ethereum in particular. Because of the importance of these tools, a thorough bibliometric study that allows us to obtain all information about cryptocurrencies is required. This study will aid related research that has been and is currently being conducted. The bibliometric analysis includes 11 articles that highlight the most related papers, research fields, countries, organizations, authors, publications, and trends over the last few years. Finally, the number of papers published has increased over the last three years. The analysis depicts the evolution of block chain technology, which is used in this type of crypto currency. And finally, will help the reader to find the answer for the research Question.