Alyssa Blackburn, Christoph Huber, Yossi Eliaz, Muhammad Shahzads Shamim · 9 authors
Bitcoin is a digital currency designed to rely on a decentralized, trustless network of anonymous agents. Using a pseudonymous-address-linking procedure that achieves >99% sensitivity and >99% specificity, we reveal that between launch (January 3rd, 2009), and when the price reached $1 (February 9th, 2011), most bitcoin was mined by only sixty-four agents. This was due to the rapid emergence of Pareto distributions in bitcoin income, producing such extensive resource centralization that almost all contemporary bitcoin addresses can be connected to these top agents by a chain of six transactions. Centralization created a social dilemma. Attackers could routinely exploit bitcoin via a "51% attack", making it possible for them to repeatedly spend the same bitcoins. Yet doing so would harm the community. Strikingly, we find that potential attackers always chose to cooperate instead. We model this dilemma using an N-player Centipede game in which anonymous players can choose to exploit, and thereby undermine, an appreciating good. Combining theory and economic experiments, we show that, even when individual payoffs are unchanged, cooperation is more frequent when the game is played by an anonymous group. Although bitcoin was designed to rely on a decentralized, trustless network of anonymous agents, its early success rested instead on cooperation among a small group of altruistic founders.
In the paper we investigate consensus formation, from an economic perspective, in a Proof-of-Stake (PoS) based platform inspired by the Algorand blockchain. In particular, we consider PoS in relation to governance, focusing on two main issues. First we discuss alternative sampling schemes, which can be adopted to select voting committees and to define the number of votes of committee members. The selection probability is proportional to one’s stake and increases with it. Participation in governance allows users to affect the platform’s decisions as well as to obtain a reward. Then, based on such preliminary analysis, we introduce a microeconomic model to investigate the optimal stake size for a generic user. In the model we conceptualize an optimal stake, for a user, as striking the balance between having Algos immediately available for transactions and setting aside currency units to increase the probability of becoming a committee member. Our main findings suggest that the optimal stake can be quite sensitive to the user’s preferences and to the rules for selecting committees. We believe the findings may support policy decisions in PoS based platforms.
Since following Sraffa (and Keynes), most everything may have its "own rate of interest", economists should place "interest" within the more general category of rent, since most anything, not just money, may be rented; that should then be analyzed separately from sale price. Financial asset sale prices, given their importance as a link to the future (along with money), should be analyzed in detail within the category of sale prices, or as a 3rd special, distinct price category. Keynes' "general theory" may be interpreted as a generalization of his own, distinctive earlier "special theory"; not, as he thought, as a generalization of previous "classical "theory". That was a completely different theory dealing with an imaginary barter exchange economy. Rothbard's pseudo-history of money should be read as imitating Rousseau's "Second Discourse"; for Rothbard, mankind's secular fall is not caused by the introduction of private property, but by the introduction of government.
In the emerging realm of decentralized finance (DeFi), most of the existing Automated Market Maker (AMM) protocols used by major platforms like Uniswap and Curve are governed by a static mathematical equation, such as the constant product curve. One major shortcoming of these curves is that they require external forces to maintain the price of the liquidity pool (LP), subjecting the LP to loss due to arbitrage. A novel solution, the dynamic curve AMM, was recently proposed to ensure that the pool price always matches the market price, making the LP invulnerable to arbitrageurs. Dynamic curves, however, have a path-dependent trading problem, meaning that the number of trades and the distribution of trades affect the trader’s gain. We show how to find the optimal trading policy for a dynamic AMM curve under several settings. We first show that in a zero-transaction-fee setting the optimal trading policy is to place infinitesimally small trades, resulting in zero slippage. Then, we present an algorithm that computes the optimal policy in a fixed-number-of-trade setting. Though the problem has an exponentially large search space, our algorithm utilizes dynamic programming to achieve a polynomial run-time. Finally, we generalize the solution to more complex settings, including a per-order-fee setting and a percentage-fee setting.
Crowdfunding is a process of generating funds by receiving small chunks of money from public by showcasing the project any creator desires to execute. Donation based crowdfunding is a popular fundraising technique where contributions made by the public are labeled as donations without any rewards in return. Match funding is an extension of the crowdfunding mechanism but with the involvement of a rich individual/organization willing to match ‘x’ amount from the donations made by the general public. But, the problem of fundraising for project through such means is that there is an inconsistent & non-transparent exchange of information about a project at regular intervals among creator and its contributors. The current system also lacks in focusing towards the desired area of interest of the contributors. Therefore, it’s needed to improvise this flaw of the current crowdfunding scenario. This paper proposes a system which aims to give more importance to contributor & his/her contribution by using their donation amounts to identify the match amount for a project & it also involves contributors in the decision-making process for projects thereby creating a decentralized governance. The proposed system incorporates the benefits of crowdfunding & match funding along with the utilization of a concept called Quadratic Funding for calculating project’s final disbursement amount. The given system focuses only on the donation-based mechanism for funding public goods i.e., the goods which are vastly beneficial to the general public and are non-rivalrous and non-excludable in nature. The system is implemented using the blockchain technology.
The term ‘non-fungible’ is used in economics to denote the possession of unique objects and to describe things that cannot be replaced by others because they have a set of unique properties. A ‘token’ as a unit of account is a record in a distributed blockchain that is controlled by a computer algorithm of a smart contract, in which the values of the balances on the accounts of token holders are recorded, making it possible to transfer them from one wallet to another.
The paper highlights some commonalities between the development of cryptocurrencies and the evolution of ecosystems. Concepts from evolutionary finance embedded in toy models consistent with stylized facts are employed to understand what survival of the fittest means in cryptofinance. Stylized facts for ownership, trading volume and market capitalization of cryptocurrencies are selectively presented in terms of scaling laws.
In this chapter structures that generate yield in cryptofinance will be analyzed and related to leverage. While the majority of crypto-assets do not have intrinsic yields in and of themselves, similar to cash holdings of fiat currency, revolutionary innovation based on smart contracts, which enable decentralised finance, does generate return. Examples include lending or providing liquidity to an automated market maker on a decentralised exchange, as well as performing block formation in a proof of stake blockchain. On centralised exchanges, perpetual and finite duration futures can trade at a premium or discount to the spot market for extended periods with one side of the transaction earning a yield. Disparities in yield exist between products and venues as a result of market segmentation and risk profile differences. Cryptofinance was initially shunned by legacy finance and developed independently. This led to curious and imaginative adaptions, reminiscent of Darwin's finches, including stable coins for dollar transfers, perpetuals for leverage, and a new class of exchanges for trading and investment.
We leverage a transaction costs narrative to provide a theoretically unified presentation of the evolution of exchange, with the latest evolutionary frontier being cryptocurrency and decentralized finance. We show that with each new development in the evolution of money, the new form or medium of exchange must reduce transaction costs relative to relevant alternatives. The development of blockchain and cryptocurrency reduced the cost of transferring currency by removing the need for a trusted third party to intermediate funds while also providing the benefit of anonymity/pseudonymity. Likewise, decentralized finance does not require a third party to intermediate savings and investment and can provide contingent anonymity to borrowers. While these innovations have attracted investment in the economically developed world, they appear to have significantly reduced transaction costs for transactors who might otherwise be defrauded of funds by corrupt governments who may extort third parties responsible for intermediating funds.
We review the recent developments in dynamic inventory models with financial flow considerations. The focus is on the literature that introduces cash flow dynamics into the classic inventory models that do not explicitly consider the interactions between physical (or material) and financial flows. These augmented models serve two important purposes. First, they help understand the impact of financial flows on inventory dynamics and decisions. Second, with the connection to the classic inventory models, one can leverage the extant results to derive the optimal control policy or to evaluate/optimize the performance of any given type of policy and reveal insights. We summarize models for both single-stage and multi-stage inventory systems, and discuss the implications and applications to decentralized systems within a broader topic of supply chain finance.
Bit coin might be known as the first crypto currency, the truth holds that it has been the first successful attempt towards the path of decentralized world that paved the way for vast technological advances bring forth thousands of coins in the new online world.Based on respective block chains and operated as a peer-to-peer network, its security is guaranteed by cryptographic algorithms instead of the sovereigns of the respective countries and has the potential to become a major means of payment for ecommerce, trading and as it forays into the art world who knows what the future of block chain holds.Instead of serving one country or some countries, block chain serves the entire world.
Private cryptocurrencies allow for payments without the need for a financial institution. These institutions, the central bank and retail banks, may thus observe a decline in the demand for their payments systems, i.e. cash and deposits. Using the monetary search model of Lagos and Wright (2005), we show that the central bank is able to tilt the playing field until it wins. By introducing an interest-bearing central bank digital currency (CBDC), the central bank is able to provide a payment system which is superior to cryptocurrencies. Miners cannot match the CBDC rate and go bankrupt. Retail banks, on the other hand, face lower profits but survive in the equilibrium. In addition, it can be welfare-improving to kick out cryptocurrencies by an interest-bearing CBDC.
Ludwig von Mises produced an impossibility theorem indicating that economic calculation in the absence of market prices was impossible. This gave rise to the ‘socialist calculation debate’ in the first half of the twentieth century. This paper makes use of the insights of that debate to shed light on other situations where decision makers are required to allocate resources in areas where there are no market prices. A pertinent example would be most corporate social responsibility programs. In the absence of market prices local information cannot be communicated to decision makers. The paper further argues that blockchain technology can create the institutional environment for markets to emerge and consequently overcome the problem of missing prices.
We examine the distribution of realized Bitcoin daily log-returns and find significantly-thin tails. From there we construct a simple connection back to traditional volatility modelling. And then we discuss how this connection can serve as a foundation to leverage existing derivative quant research to explore cryptocurrency market dynamics. These results also suggest a connection between cryptocurrency exchange structure and trading dynamics.
Optimal simple rules for the monetary policy of the first stochastically dominant crypto-currency are derived in a Dynamic Stochastic General Equilibrium (DSGE) model, in order to provide optimal responses to changes in inflation, output, and other sources of uncertainty. The optimal monetary policy stochastically dominates all the previous crypto-currencies, thus the efficient portfolio is to go long on the stochastically dominant crypto-currency: a strategy-proof arbitrage featuring a higher Omega ratio with higher expected returns, inducing an investment-efficient Nash equilibrium over the crypto-market. Zero-knowledge proofs of the monetary policy are committed on the blockchain: an implementation is provided.
Potreba izdavanja maloprodajnog digitalnog novca od strane središnjih banaka za građanstvo sve se češće spominje kao nužnost, ponajprije zbog financijske inkluzije i smanjenja korištenja gotovine u proteklih nekoliko godina. Osim toga, središnje banke razmatraju korištenje tehnologije raspodijeljenih glavnih knjiga zbog ubrzavanja veleprodajnog plaćanja i trgovanja imovinom te izbjegavanja korištenja pružatelja usluga u tu svrhu. S tim u vidu niz središnjih banaka u svijetu u posljednjih nekoliko godina pokrenuo je projekte i pilote za testiranje DLT sustava u svrhu izdavanja, trgovanja i plaćanja CDBC-om. Ovaj rad donosi načine provedbe i zaključke iz najznačajnijih te najbolje dokumentiranih istraživanja i pilota provedenih u tu svrhu. Nakon toga, rad ukratko prolazi kroz specifičnosti najčešće korištenih DLT platformi u navedenim istraživanjima i pilotima. Naposljetku se rad bavi sigurnosnim aspektima izdavanja CDBC-a na DLT platformi, uključujući tehnike za unaprjeđenje povjerljivosti te moguće ranjivosti i programske greške pametnih ugovora, te najboljim praksama koje bi trebalo slijediti kako bi se osigurala sigurnost takvih sustava.
Abstract We develop a continuous‐time control approach to optimal trading in a Proof‐of‐Stake (PoS) blockchain, formulated as a consumption‐investment problem that aims to strike the optimal balance between a participant's (or agent's) utility from holding/trading stakes and utility from consumption. We present solutions via dynamic programming and the Hamilton–Jacobi–Bellman (HJB) equations. When the utility functions are linear or convex, we derive close‐form solutions and show that the bang‐bang strategy is optimal (i.e., always buy or sell at full capacity). Furthermore, we bring out the explicit connection between the rate of return in trading/holding stakes and the participant's risk‐adjusted valuation of the stakes. In particular, we show when a participant is risk‐neutral or risk‐seeking, corresponding to the risk‐adjusted valuation being a martingale or a sub‐martingale, the optimal strategy must be to either buy all the time, sell all the time, or first buy then sell, and with both buying and selling executed at full capacity. We also propose a risk‐control version of the consumption‐investment problem; and for a special case, the “stake‐parity” problem, we show a mean‐reverting strategy is optimal.
The benefits offered by cryptocurrencies are a great many: transaction cost and speed, security and transparency, to name a few. Yet, there is also a major drawback represented by their extremely high volatility. Stablecoins offer an ideal solution since they preserve all the advantages of blockchain-based currencies, while reducing considerably the volatility issue. Currently, stablecoins are almost exclusively pegged to the US Dollar and secured by non-crypto assets held in account at custodial institutions. In this article, we present the design of a decentralized organization aimed at issuing stablecoins backed by crypto-assets stored on-chain and pegged to assets different from fiat money. Our model offers several advantages, in particular, it allows the issuance of stablecoins in a trustless, permission-less and non-custodial environment.