We coin the term Protocols for Loanable Funds (PLFs) to refer to protocols which establish distributed ledger-based markets for loanable funds. PLFs are emerging as one of the main applications within Decentralized Finance (DeFi), and use smart contract code to facilitate the intermediation of loanable funds. In doing so, these protocols allow agents to borrow and save programmatically. Within these protocols, interest rate mechanisms seek to equilibrate the supply and demand for funds. In this paper, we review the methodologies used to set interest rates on three prominent DeFi PLFs, namely Compound, Aave and dYdX. We provide an empirical examination of how these interest rate rules have behaved since their inception in response to differing degrees of liquidity. We then investigate the market efficiency and inter-connectedness between multiple protocols, examining first whether Uncovered Interest Parity holds within a particular protocol and second whether the interest rates for a particular token market show dependence across protocols, developing a Vector Error Correction Model for the dynamics.
A direct mechanism of impact on the utility functions of agents in social and economic systems is studied. This mechanism is widely used in various forms by public authorities, commercial and non-profit organizations for reaching the desired behavior of individuals. A game-theoretic model of a hierarchical system composed of agents and super-individuals who can modify their utility functions is considered. The properties of equilibria in this model are investigated and the systems of different structure are compared with each other in terms of efficiency. It is established that the centralized management of super-individuals in certain conditions may be less effective in terms of maximizing public welfare than the decentralized schemes. In particular, this property can explain the successful development of peer-to-peer markets and decentralized financing mechanisms of projects in various spheres of human activity. Also, the presence of vertical competition effects in the system is demonstrated, which reduce the efficiency of equilibria with increasing the number of super-individuals.
A new type of Automated Market Makers (AMMs) powered by Blockchain technology keep liquidity on-chain and offer transparent price mechanisms. This innovation is a significant step in the direction of building a more transparent and efficient financial market. This paper explores analytically market mechanisms and shows the conditions when those mechanisms are equivalent. Furthermore, we show that AMM mechanisms inherently create loses for market makers from inefficient prices (dictated by the AMM solutions), however, these mechanisms work well for assets with low volatility. We further analytically explore the losses and quantify them. The paper ends by discussing the design of efficient decentralized exchange compared to traditional Central Limited Order Books (CLOBs) and highlights the former's potential regarding decentralized finance.
Bitcoin, and more generally, cryptocurrencies, are often described as a new type of money. In this post, we argue that this is a misconception. Bitcoin may be money, but it is not a new type of money. To see what is truly new about Bitcoin, it is useful to make a distinction between âmoney, â the asset that is being exchanged, and the âexchange mechanism, â that is, the method or process through which the asset is transferred. Doing so reveals that monies with properties similar to Bitcoin have existed for centuries. However, the ability to make electronic exchanges without a trusted partyâa defining characteristic of Bitcoinâis radically new. Bitcoin is not a new class of money, it is a new type of exchange mechanism, and this type of exchange mechanism can support a variety of forms of money as well as other types of assets.
Blockchain protocols differ in fundamental ways, including the mechanics of selecting users to produce blocks (e.g., proof-of-work vs. proof-of-stake) and the method to establish consensus (e.g., longest chain rules vs. BFT-inspired protocols). These fundamental differences have hindered "apples-to-apples" comparisons between different categories of blockchain protocols and, in turn, the development of theory to formally discuss their relative merits. This paper presents a parsimonious abstraction sufficient for capturing and comparing properties of many well-known permissionless blockchain protocols, simultaneously capturing essential properties of both proof-of-work and proof-of-stake protocols, and of both longest-chain-type and BFT-type protocols. Our framework blackboxes the precise mechanics of the user selection process, allowing us to isolate the properties of the selection process which are significant for protocol design. We illustrate our framework's utility with two results. First, we prove an analog of the CAP theorem from distributed computing for our framework in a partially synchronous setting. This theorem shows that a fundamental dichotomy holds between protocols (such as Bitcoin) that are adaptive, in the sense that they can function given unpredictable levels of participation, and protocols (such as Algorand) that have certain finality properties. Second, we formalize the idea that proof-of-work (PoW) protocols and non-PoW protocols can be distinguished by the forms of permission that users are given to carry out updates to the state.
We coin the term *Protocols for Loanable Funds (PLFs)* to refer to protocols\nwhich establish distributed ledger-based markets for loanable funds. PLFs are\nemerging as one of the main applications within Decentralized Finance (DeFi),\nand use smart contract code to facilitate the intermediation of loanable funds.\nIn doing so, these protocols allow agents to borrow and save programmatically.\nWithin these protocols, interest rate mechanisms seek to equilibrate the supply\nand demand for funds. In this paper, we review the methodologies used to set\ninterest rates on three prominent DeFi PLFs, namely Compound, Aave and dYdX. We\nprovide an empirical examination of how these interest rate rules have behaved\nsince their inception in response to differing degrees of liquidity. We then\ninvestigate the market efficiency and inter-connectedness between multiple\nprotocols, examining first whether Uncovered Interest Parity holds within a\nparticular protocol and second whether the interest rates for a particular\ntoken market show dependence across protocols, developing a Vector Error\nCorrection Model for the dynamics.\n
The equity and currency tokens are typically two kinds of initial coin offerings (ICOs) like Bitcoin or Ethereum based on the platform of Blockchains to provide a particular product or service, it is very important to study the mechanism of Blockchain Ecosystems. The goal of this paper is to explain the stable in the sense for the existence of consensus equilibria for mining gap games by using one new concept called âconsensus games (CG)â under the framework of Blockchain Ecosystems which mainly mean the economic activities by taking into the account of three types of different factors which are expenses, reward mechanism and mining power for the work on blockschain by applying consensuses including the âProof of Workâ due to Nakamoto in 2008 as a special case.
The emergence of cryptocurrencies has been one of the most notable monetary phenomenon of the last decade. Many academics and analysts have found a clear precedent to this event in Friedrich Hayek's latest monetary work, Denationalization of money. The aim of this article is to analyze what we can learn about cryptocurrencies by re-reading this book. As will be proven, Hayek would surely have rejected the idea that Bitcoin and cryptocurrencies with similar characteristics could be accepted as money in the market. Furthermore, this paper will prove that a very close connection between Stablecoins and private money exists, following the Austrian economistâs predictions in a context of monetary competition.
Charles Bertucci, Louis Bertucci, JeanâMichel Lasry, PierreâLouis Lions
We present an analysis of the Proof-of-Work consensus algorithm, used on the Bitcoin blockchain, using a Mean Field Game framework. Using a master equation, we provide an equilibrium characterization of the total computational power devoted to mining the blockchain (hashrate). From a simple setting we show how the master equation approach allows us to enrich the model by relaxing most of the simplifying assumptions. The essential structure of the game is preserved across all the enrichments. In deterministic settings, the hashrate ultimately reaches a steady state in which it increases at the rate of technological progress. In stochastic settings, there exists a target for the hashrate for every possible random state. As a consequence, we show that in equilibrium the security of the underlying blockchain is either $i)$ constant, or $ii)$ increases with the demand for the underlying cryptocurrency.
Chad Albrecht, Steven R. Hawkins, Kristopher McKay Duffin
Cryptocurrency, and especially Bitcoin, has struggled to gain recognition as a legitimate currency from governments, financial institutions, and consumers. This has occurred because many analysts and consumers believe that Bitcoin is not a stable and consistent store of value, a unit of measurement, or a medium of exchange. One way to overcome this challenge is for Bitcoin to be used as both a currency and store of value by a greater percentage of the worldâs population. This paper seeks to identify how a change in Bitcoinâs monetary measurement (or denomination) can more easily facilitate Bitcoin transactions to increase its use. Specifically, we posit that applying whole number bias theory, from the cognitive psychology and mathematics fields, to Bitcoinâs unit of measurement will allow the value of Bitcoin to be referenced in smaller and easier tounderstand units with fewer numbers after the decimal pointâsuch as the âBitâ or the âSatoshi.â In the process, the use of Bitcoin will include more whole numbers and allow the general public to more easily assign value to Bitcoin in day-to-day transactions.
Anwar Hasan Abdullah Othman, Syed Musa Alhabshi, Salina Kassim, Adam Abdullah · 5 authors
Purpose This study uses the autoregressive distributed lag model (ARDL) econometric approach to investigate empirically the effects of cryptocurrencies, the gold standard and traditional fiat money on global income inequality measured based on the Gini coefficient, and various ratios of income inequality distribution such as top 1 per cent, top 10 per cent, top 40 per cent and top 50 per cent. Design/methodology/approach The study uses the ARDL econometric approach. Findings The findings indicated that cryptocurrency and gold standard monetary systems contributed significantly to reducing global inequality of income and wealth distribution. Conversely, the traditional fiat money system contributes positively to global income and wealth inequality while also contributing significantly to their fluctuation. Practical implications This suggests that the fiat monetary system results in the coercive redistribution of income and wealth if governments pursue a social welfare policy. They must resolve this conflict between the current fiat monetary system and social policy by opting for an alternative monetary system such as cryptocurrency or gold standard. These alternative monetary systems offer the promise of resolving the income and wealth inequality associated with the traditional monetary system which are accompanied with the channels of inflation, lack of financial inclusion and debt creation, and to offer a more sustainable financial system. Originality/value The study recommends that monetary policy must be revisited to account for its direct effect on income and wealth redistribution to achieve social welfare goals.
In the digital economy era, the development of a distributed robust economy system has become increasingly important. The blockchain technology can be used to build such a system, but current mainstream consensus protocols are vulnerable to attack, making blockchain systems unsustainable. In this paper, we propose a new Robust Proof of Stake (RPoS) consensus protocol, which uses the amount of coins to select miners and limits the maximum value of the coin age to effectively avoid coin age accumulation attack and Nothing-at-Stake (N@S) attack. Under a comparison framework, we show that the RPoS equals or outperforms Proof of Work (PoW) protocol and Proof of Stake (PoS) protocol in three dimensions: energy consumption, robustness, and transaction processing speed. To compare the three consensus protocols in terms of trade efficiency, we built an agent-based model and find that RPoS protocol has greater or similar trade request-satisfied ratio than PoW and PoS. Hence, we suggest that RPoS is very suitable for building a robust digital economy distributed system.
We are interested in mining incentives in the Bitcoin protocols. The blockchain Bitcoin. The mining process is used to confirm and secure all transactions in the network. This process is organized as a speed game between individuals or groups, referred to as "miners" or "pools of miners", respectively. Miners or pools of miners use different computational powers to solve a mathematical problem, obtain a proof-of-work, spread their solution, and this solution is verified by the community before the block is added in the only public blockchain replicated over all nodes. First, we define and specify this game in the case with n players, n 2, under the assumptions denoted by (H) below. Next, we analytically find its Nash equilibrium points. In other words, we generalize the idea of [1] by taking into account the hypotheses of Peter Rizun's paper [2], through cumbersome computations. Our purpose here is to show some intuitions about the model rather than derive applicable results.
Classical monetary systems regularly subject the most vulnerable majority of the world's population to debilitating financial shocks, and have manifestly allowed uncontrolled global inequality over the long term. Given these basic failures, how can we avoid asking whether mainstream macroeconomic principles are actually compatible with democratic principles such as equality or the protection of human rights and dignity? This idea paper takes a constructive look at this question, by exploring how alternate monetary principles might result in a form of money more compatible with democratic principles -- dare we call it "democratic money"? In this alternative macroeconomic philosophy, both the supply of and the demand for money must be rooted in people, so as to give all people both equal opportunities for economic participation. Money must be designed around equality, not only across all people alive at a given moment, but also across past and future generations of people, guaranteeing that our descendants cannot be enslaved by their ancestors' economic luck or misfortune. Democratic money must reliably give all people a means to enable everyday commerce, investment, and value creation in good times and bad, and must impose hard limits on financial inequality. Democratic money must itself be governed democratically, and must economically facilitate the needs of citizens in a democracy for trustworthy and unbiased information with which to make wise collective decisions. An intriguing approach to implementing and deploying democratic money is via a cryptocurrency built on a proof-of-personhood foundation, giving each opt-in human participant one equal unit of stake. Such a cryptocurrency would have both interesting similarities to, and important differences from, a Universal Basic Income (UBI) denominated in an existing currency.
Zixuan Zhang, Michael Zargham, VĂctor M. Preciado
Abstract Blockchain networks have attracted tremendous attention for creating cryptocurrencies and decentralized economies built on peer-to-peer protocols. However, the complex nature of the dynamics and feedback mechanisms within these economic networks has rendered it difficult to reason about the growth and evolution of these networks. Hence, proper mathematical frameworks to model and analyze the behavior of blockchain-enabled networks are essential. To address this need, we establish a formal mathematical framework, based on dynamical systems, to model the core concepts in blockchain-enabled economies. Drawing on concepts from differential games, control engineering, and stochastic dynamical systems, this paper proposes a methodology to model, simulate, and engineer networked token economies. To illustrate our framework, a model of a generalized token economy is developed, where miners provide a commodity service to a platform in exchange for a cryptocurrency and users consume a service from the platform. We illustrate the dynamics of token economies by simulating and testing two different block reward strategies. We then conclude by outlining future research directions that will integrate additional methods from signal processing and control theory into the toolkit for designers of blockchain-enabled economic systems.
Abstract The emergence of a decentralized peerâtoâpeer (P2P) platform that matches lending and borrowing without collateral requirement could have weakened the bank lending and balance sheet channels of monetary policy, calling monetary policy effectiveness into question. Through the perspective of a new Keynesian model expanded with a twoâsided P2P platform and group identity, we find that monetary policy can be financially destabilizing when firms have access to alternative unregulated financing instruments to dodge monetary grabs. Contractionary monetary policy that aims to disincentivize leverage could unintendedly end up with elevated debt leverage. Although the economy largely responds to productivity and investment shocks as intended by the policy, the responses become more volatile, indicating the weakening monetary grips on the economy.
Drawing on some some early literature in economics we develop a framework that assists the consideration of Bitcoin as a novel economic good. We highlight an essential tension between scarcity and concentration as having an overarching impact on Bitcoin's value. In conjunction with the structural features of its blockchain and consensus protocol, as instantiated by the mechanism of its code, the role of provisioning for future demand and production places a keener emphasis on the role of inventory management. This creates an interesting dynamic in Bitcoin between its structurally regulated supply and organic reservation demand for bitcoins by miners on the one hand and its broader market demand on the other. Understanding the features of this dynamic as a foundation for Bitcoin gives us some simple insights on its price path.
We model the competition over mining resources and over several cryptocurrencies as a non-cooperative game. Leveraging results about congestion games, we establish conditions for the existence of pure Nash equilibria and provide efficient algorithms for finding such equilibria. We account for multiple system models, varying according to the way that mining resources are allocated and shared and according to the granularity at which mining puzzle complexity is adjusted. When constraints on resources are included, the resulting game is a constrained resource allocation game for which we characterize a normalized Nash equilibrium. Under the proposed models, we provide structural properties of the corresponding types of equilibrium, e.g., establishing conditions under which at most two mining infrastructures will be active or under which no miners will have incentives to mine a given cryptocurrency.
This article introduces the special issue featuring âThe evolution of diverse e-money: digital-community currencies and cryptocurrencies,â and argue on diversity and evolution of modern money, including community currencies and cryptocurrencies. How such new âcurrenciesâ survive through usersâ choice in money and what the criteria of such decision are highly critical issues. We contrast the meanings of Greshamâs law âBad money drives out good,â and Hayekâs principle of choice in money âGood money drives out badâ and show that there are necessary conditions for either Greshamâs law or the principle of choice in money to hold. For the principle of âchoice in currencyâ to function well, both (1) different denominations for the distinction of money in quality, and (2) the non-fixed exchange rates are necessary. Since cryptocurrencies met these conditions, the principle of choice in money began to work. Cryptocurrencies took the test of usersâ choice in money in the search for good money but failed to pass the criteria of stability of currency value. Then, digital-community currencies that involve local and community contexts are the next candidates for good money. We observe that two DCCs in Japan, Sarubobo Coin and Kisarazu Coin are currently challenging toward the realization of good money.
This paper studies the dynamic construction of a blockchain by competitive miners. In contrast to the literature, we assume a finite time horizon. Moreover, miners are rewarded for blocks that eventually become part of the longest chain. It is shown that popular mining strategies such as adherence to conservative mining or to the longest-chain rule constitute pure-strategy Nash equilibria. However, these equilibria are not subgame perfect.