Blockchain Papers

Gurdip Kaur, Arash Habibi Lashkari, Iman Sharafaldin, Ziba Habibi Lashkari

No abstract is available for this record.

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.

Thomas Puschmann, Marine Huang-Sui

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.

Saqib Hussain, T. B. Sivakumar, Alex Khang

Cryptocurrency is an eight-year-old technology that uses an encrypted peer-to-peer network to facilitate digital barter. Bitcoin, the first and most popular cryptocurrency, is paving the way as a disruptive technology to long-standing and unchanging financial payment systems. While cryptocurrencies are unlikely to replace traditional fiat currency, they have the potential to alter how Internet-connected global markets interact with one another, removing the restrictions that exist around traditional national currencies and exchange rates. Technology advances at a breakneck pace, and a technology’s success is almost entirely determined by the market it tries to improve. Cryptocurrencies have the potential to change digital trade marketplaces by enabling a fee-free trading mechanism. A SWOT analysis of bitcoin is offered, which highlights some of the recent events and movements that may have an impact on whether bitcoin contributes to a paradigm change in economics.

Stefanos Leonardos, Daniël Reijsbergen, Barnabé Monnot, Georgios Piliouras

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.

Nicola Dimitri

In the last few years, a number of blockchain-based online platforms decided to use consensus procedures other than Proof of Work (PoW), originally adopted by Bitcoin. An alternative protocol, which attracted much attention, is the so-called Proof-of-Stake (PoS), which unlike PoW consensus is not based on solving an energy-consuming cryptopuzzle, but rather on the amount of currency units owned by a user. Different platforms adopted alternative versions of PoS. In this article, we investigate a version of PoS inspired by Algorand, which embodies a number of specific features. Indeed, to confirm a new block in the chain Algorand introduces three steps: proposal, selection , and confirmation of a block. Each step is performed by randomly selected users, where draws are based on PoS. We find explicit solutions for individual money demand, under the main simplifying assumption that a user is rewarded by the system only for the first role that she's drawn for. We do so by considering both exogenous and endogenous money supply. We also discuss the monetary equilibrium of the system, an important element in the analysis because a long-lasting disequilibrium of the economy may cause disappointment and induce some users to leave the system. Our findings suggest that an equilibrium seems to be more likely to take place if users have heterogeneous, rather than homogeneous, preferences.

Takeshi Yoshihara, Taisei Kaizoji

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.

Pierpaolo Benigno

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.

Misha Perepelitsa

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.

Tarun Chitra, Kshitij Kulkarni

Maximal Extractable Value (MEV) has generally been viewed as a negative, parasitic aspect of economic transactions on blockchains that increases costs for non-strategic users. Recent work has shown that MEV is not always bad for social welfare in crypto networks. In this note, we demonstrate that if rational validators in Proof of Stake (PoS) protocols are able to earn a portion of MEV revenue, by a process we call MEV redistribution, they are disincentivized to unstake and lower economic security. We construct a joint staking-lending dynamical system in which a fraction of MEV revenue is used to increase staking returns. We formally show that this MEV redistribution can avoid bad competitive equilibria between staking and lending in which no users stake under benign conditions on the reward inflation schedule of the protocol, and conduct numerical simulations that demonstrate this. This represents another potentially positive externality of MEV, provided that the mechanism for redistribution is well-designed.

Adedeji Daniel Gbadebo

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.

Yuanyuan Zhang, Stephen Chan, Jeffrey Chu, Shou–hsing Shih

Decentralized finance, or ‘De-Fi’, is an emerging sector and movement in finance and the cryptocurrency space that aims to extend the idea of digital currencies to a global decentralized financial system. In many cases, customized ‘coins’ or ‘tokens’ are used for applications such as borrowing or lending, providing liquidity, and even voting. Built on the same foundations of traditional cryptocurrencies (e.g. Bitcoin), these tokens possess monetary value and can be traded using fiat currencies on specialized decentralized exchanges. We provide the first analysis investigating the market efficiency of the decentralized finance market through DeFi tokens. Our findings from applying the adaptive market hypothesis (AMH) revealed that the efficiency of the markets varies over time, with the majority of the DeFi token returns exhibit very short days of inefficiency and predictability in their price every year. This is consistent with the AMH, but perhaps unexpected when considering the link between emerging financial markets and market efficiency. We conclude that the majority of investors and practitioners purchase these DeFi tokens for their utility value rather than for investment purposes, hence making the DeFi market more efficient. Further robustness checks on other comparable products in the blockchain ecosystem such as NFTs also reveal similar results.

Kee-Youn Kang, SEUNGDUCK LEE

Abstract A search‐theoretic model is constructed, where money and Bitcoin can be used as mediums of exchange. We investigate how each currency facilitates transactions and how they compete with each other. Quantitative analysis shows that welfare in an economy with both money and Bitcoin is lower than in a money‐only economy due to congestions in the confirmation of Bitcoin transactions and that the welfare gap between the two economies expands as inflation rises. Moreover, an increase in transaction fees for Bitcoin can increase welfare by reducing inefficient Bitcoin transactions.

Jonathan Chiu, Thorsten V. Koeppl

Abstract How well can a cryptocurrency serve as a means of payment? Cryptocurrencies need to overcome double‐spending by costly mining and by delaying settlement. We formalize this insight through an incentive constraint that rules out double‐spending and pins down the welfare costs of a cryptocurrency. We find that it is optimal to use seignorage rather than transaction fees to finance costly mining. In supplementary material, we study an extension with endogenous transaction fees and show quantitatively that the prime cost of Bitcoin arises from mining, but can be reduced substantially by optimally designing the reward system.

David Glasner

This chapter attempts to account for the rising value of cryptocurrencies using basic concepts of monetary theory. A positive value of fiat money is itself problematic inasmuch as that value apparently depends entirely on its expected resale value. A current value entirely dependent on expected future resale value seems inconsistent with backward induction. While fiat money can avoid the backward-induction problem if it is made acceptable in payment of taxes, acceptability for tax payments is unavailable to cryptocurrencies. Is the rising value of bitcoin and other cryptocurrencies a bubble? The paper argues that network effects may be an alternative mechanism for avoiding the logic of backward induction. Because users of any good subject to substantial network effects incur costs by switching to an incompatible alternative to the good currently used, users of a bitcoin for certain transactions may be locked into continued use of bitcoin despite an expectation that its future value will eventually go to zero. Thus, even if bitcoin and other cryptocurrencies are bubble phenomena, network effects may lock existing users of bitcoin into continued use of bitcoin for those transactions for which bitcoins provide superior transactional services to those provided by conventional currencies. Nevertheless, the prospects for bitcoin's expansion beyond its current niche uses are dim, because its architecture implies that a significant expansion in the demand for its transactional services would lead to rapid appreciation that is incompatible with service as a medium of exchange.

Rosa M. Lastra

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.

Akanksha Jalan, Roman Matkovskyy, Andrew Urquhart

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.

Siyuan Liu

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.

Matheus Trotta Vianna

The arise of cryptocurrencies was a significant breakthrough in our modern economies. Many people, including high-level economists, have been advocating the use of Bitcoins and of other cryptocurrencies as an alternative to national currencies, while some people are afraid that they are a fraudulent scheme or that they will bring a financial apocalypse. In order not to fall into the extreme sides of the debate, in this chapter we will separate the Bitcoin system and technology from the Bitcoin monetary unit. Whereas we recognize that the idea behind the system is revolutionary and can indeed facilitate and improve our payments and other systems, the concept behind the unit definition was based on a specific interpretation of Money. We show that the main problems of bitcoin and other cryptocurrencies that follow the same design are on the definition of the unit, based on a classical Theory of Money. In comparison, we explore some concepts of a Keynesian theory of Money, using Keynes's essential properties of Money and concepts of Modern Money Theory, to define what is Money. Finally, we present some interpretations and possible consequences of the Bitcoin design under the light of the Keynesian perspective and we show that Bitcoin cannot be characterized as Money.

Daniel Z. Zanger

In the Decentralized Finance (DeFi) setting, we present a new parametrized family of Constant Function Market Makers (CFMMs) which we call the Generalized Mean Market Makers (G3Ms), based on the generalized means. The G3Ms are intermediate between the Arithmetic Mean and Geometric Mean CFMM models, which G3Ms incorporate as special cases. We also present an extension of the G3Ms, based on the so-called Generalized f-Means, called Generalized f-Mean Market Makers (Gf3Ms). We show in addition that the G3Ms possess certain properties preferable to those exhibited by either the Arithmetic Mean CFMM or the Geometric Mean CFMM alone.

Andreas Langenohl

As blockchain technologies are discussed in their political dimensions, this paper questions the political implications of developments in decentralized finance (DeFi). It looks at the ways that DeFi projects refer to game theory as a template for designing the integration of off-chain financial processes into on-chain processes. DeFi’s reference to game theory carries normative understandings of social coordination that oscillate between (liberal) cooperation and (neo-liberal) non-cooperation and defection. This is evidenced in the ways that DeFi installs fundamental uncertainty as well as the reliability of participants’ information, as the key resource for modeling social coordination. While referring to a libertarian notion of ‘collective intelligence, ’ the models tend to involve participants in high-stake transactions under conditions of uncertainty. These results have consequences for the social studies of finance more generally: The prominence of game theory in DeFi indicates that the performativity of economic theory, often depicted in the ways that theory-derived models enable pricing calculation and the transformation of uncertainty into risk, may also result in the celebration of radical uncertainty as a resource of strategic action.

Giorgos Felekis, Jesper Kristensen

One of the most exciting recent developments in Decentralized Finance (DeFi) has been the development of decentralized exchanges, called Automated Market Mak-ers (AMMs). In this work, we study the most prominent special class of them, the Constant Function Market Makers (CFMMs). We introduce a generalized formula for CFMMs, called λCFMMs, which encapsulates the idea of combining the advantages of constant sum and constant mean CFMMs by blending their functions where$\lambda$is the degree of mixture. Our experiments demonstrate the behaviour of this generalized formula for various token pools with different properties and price differences, and evaluate its performance regarding slippage and imper-manent loss for different degrees of mixture during a trading period. We further show that given the nature of the pool and an optimization objective, different levels of mixture lead to optimal non-trivial functions, which as we show, outperform some of the most popular AMMs such as Uniswap. The novelty of$\lambda$CFMMs is both the mixing method that helps us target more efficient AMM functions and also the fact that motivates the idea of dynamic AMM functions that given certain features can self-adjust their parameters in order to produce mutual profits for both the traders and the liquidity providers.