Cryptocurrency exchanges play a key role in the cryptocurrency ecosystem, serving not only as central marketplaces for buyers and sellers to trade, but also as custodians for their customers’ cryptocurrency holdings. Exchanges, however, are thinly regulated for safety-and-soundness and face major insolvency risks from their own proprietary investments and hacking. This Article considers what would happen to customers’ custodial holdings if a cryptocurrency exchange in the United States were to fail. Any custodial relationships can potentially be characterized as a debtor-creditor relationship between the custodian and customer, rather than an entrustment or bailment of property. U.S. law gives substantial protection to the custodial holdings of securities, commodities, or cash deposits by securities or commodities brokers or banks. No such regime exist, however, for custodial holdings of cryptocurrencies. Instead, bankruptcy courts might well deem the custodial holdings to be property of the bankrupt exchange, rather than of its customers. If so, the customers would merely be general unsecured creditors of the exchange, entitled only to a pro rata distribution of the exchange’s residual assets after any secured or priority creditors had been repaid. And, even if the holdings were ultimately deemed property of the customers, however, the customers would still experience extended disruption to their access to their holdings. Cryptocurrencies are designed to address a problem of transactional credit risk—the possibility of “double spending.” The lesson here is the credit risk can arise not just from active transacting in cryptocurrency, but also from passive holding of cryptocurrency. Because this passive holding risk turns on technical details of bankruptcy and commercial law, it is unlikely to be understood, much less priced, by most market participants. The result is a moral hazard in which exchanges are incentivized to engage in even riskier behavior because they capture all of the rewards, while the costs are externalized on their customers.
Hossein Jahanshahloo, Felix Irresberger, Andrew Urquhart
This paper explores and describes historical on-chain transaction data recorded on the Bitcoin blockchain, constructs a panel of all individual Bitcoin users, and computes their balances in the cross-section and over time. We run clustering algorithms to combine addresses that belong to the same user into wallets and we find that using wallets over addresses as the unit of analysis allows for economically meaningful interpretations of user behavior. We identify and divide wallets into user categories - miners, exchanges, services, retail wallets and receiving-only addresses - and observe varying activity levels and balances in the cross-section and over time, corresponding to their intended role in the Bitcoin network. By matching historical transactions with minute-level price data, we estimate wallets' realized financial return and find that these user-types not only exhibit different transaction patterns and balances, but also different levels of financial performance. Our paper highlights opportunities for novel empirical research that exploits Bitcoin wallet-level data on individual user characteristics.
This paper studies when entrepreneurs disclose qualitative or soft firm information to raise external capital through token offerings. By using transaction-level blockchain data and real-time disclosure for a sample of 3,009 token offerings, this study demonstrates three main results. First, successful entrepreneurs report more soft information in the pre-announcement period when information asymmetry is high. Second, among all information items disseminated to investors, corporate strategy is the most value-relevant type of content. Third, during fundraising campaigns, soft information disclosure becomes costly because it increases the risk of creating investor disagreement. Consistent with theory, this study shows that a low-disclosure practice induces more investments when information asymmetry decreases.
Ahto Buldas, Dirk Draheim, Mike Gault, Risto Laanoja · 11 authors
<p>Since its introduction with Bitcoin in 2009, blockchain technology has received tremendous attention by academia, industry, politics and media alike, in particular, through extended blockchain-based visions such as smart contracts, decentralized finance, and, most recently, Web3. The critical prerequisite for any such blockchain-based vision to be turned into reality is uncapped scalability. Furthermore, and equally important, blockchain technology needs to transcend the stage of specialized tokens into an adaptive, heterogeneous tokenization platform. In this paper, we explain the Alphabill family of technologies that addresses both unlimited scalability and unrestricted adaptivity. We deliver a sharded blockchain technology with unlimited scalability and performance, called KSI Cash, which is based on a new form of electronic money scheme, the bill scheme. We present performance tests of KSI Cash that we have conducted with the European Central Bank and a group of eight national central banks from the Eurosystem in order to assess the technological feasibility of a digital euro, showing the system operating with 100 million wallets and 15 thousand transactions per second (under simulation of realistic usage), having an estimated carbon footprint of 0.0001g CO2 per transaction (Bitcoin = 100 kg and more); furthermore, showing the system operating with up to 2 million payment orders per second, an equivalent of more than 300.000 transactions per second (in a laboratory setting with the central components of KSI Cash), scaling linearly in terms of the number of deployed shards. We explain, in detail, the key concepts that unlock this performance (i.e., the concepts of the bill money scheme). The results provide evidence that the scalability of our technology is unlimited in both permissioned and permissionless scenarios, resulting into the Alphabill Money technology. Next, we contribute the architecture of a universal tokenization platform that allows for universal asset tokenization, transfer and exchange as a global medium of exchange, called Alphabill platform. We reveal the crucial conceptual and technical contributions of the platform's architecture and their interplay, including the data structures of KSI Cash and Alphabill Money, the dust collection solution of Alphabill Money, and the atomic swap solution of the Alphabill platform.</p>
Kanis Saengchote, Tālis J. Putniņš, Krislert Samphantharak
Decentralized Finance (DeFi) is built on a fundamentally different paradigm: rather than having to trust individuals and institutions, participants in DeFi potentially only have to trust computer code that is enforced by a decentralized network of computers. We examine a natural experiment that exogenously stress tests this alternative paradigm by revealing the identities of individuals associated with a DeFi protocol, including a convicted criminal. We find that, in practice, DeFi does not (yet) fully remove the need for trust in individuals. Our findings suggest that that because smart contracts are incomplete, they are subject to run risk (Allen and Gale, 2004) and personal character and trust of individuals are still relevant in this alternative financial system.
Decentralized Finance (DeFi) is a new financial industry built on blockchain technologies. Decentralized financial services have consequently increased the ability to lend, borrow, and invest in decentralized investment vehicles, allowing investors to bypass third party intermediaries. DeFi's promise is to reduce the cost of transaction and management fees whilst increasing trust between agents of the Financial Industry 3.0. This paper provides an overview of the different components of DeFi, as well as the risks involved in investing through these new vehicles. We will also propose an allocation methodology which will integrate and quantify these risks.
Decentralized Finance, known as DeFi (Decentralized Finance), refers to the use of blockchain and digital assets or crypto-assets for the provision of financial services. In this way, through DeFi applications, services such as loans, insurance, crypto-asset exchanges, among others, are offered, which are structured based on crypto-assets and through technologically decentralized applications. This paper discusses the concept of DeFi and how it challenges the traditional market infrastructures of the financial sector, demystifying the idea of absolute decentralization, generally mentioned in the crypto-asset arena, from the perspective of decision-makers and governors of these decentralized applications. Subsequently, the paper analyzes the opportunities and challenges of DeFi for consumers, financial institutions, new competitors and financial regulators. Among the opportunities, the paper explains how DeFi could contribute to financial inclusion, to the automation of certain financial products and how it is a key factor for the development of metaverses. As part of the challenges, the paper analyzes the problems of money laundering and terrorist financing in these markets, financial consumer protection, corporate governance issues, the lack of transparency of these products, cybersecurity risks and systemic risk issues. Finally, the paper addresses some early regulatory responses that policymakers have tried in response to some of these challenges in different jurisdictions.
Decentralized Finance (DeFi) aims to use advancements in both computation and cryptography to tackle standard economic problems. It must, therefore, operate within the intersection of constraints required by both the computer science and economic domains. We explore a foundational question at the junction of those fields: is it possible to synthesize variable market-clearing risk-free yield for native tokens via smart contracts? We show using a stylized model representing a large class of existing decentralized consensus algorithms that this is not possible. This places strong bounds on what decentralized financial products can be built and constrains the shape of future developments in DeFi. Among other limitations, our results reveal that markets in DeFi are incomplete.
This paper investigates the market reaction to large positive or negative liquidity shocks on the value of tokens traded on decentralized exchanges (DEXes) on the Ethereum blockchain. Automated market makers (AMMs) and constant product markets provide transparent and decentralized ways to directly swap two blockchain tokens for each other via the use of liquidity pools. Using trade-by-trade data of 2.77 million swaps of 14 different tokens traded on Uniswap v2, v3 and SushiSwap, we find that the size of sell orders significantly correlates with negative future token returns, while buy size positively correlates with future token returns. Using an event study approach, we quantify the market reaction of unusually large sell and buy orders (top 1% percentile) and identify that the market reaction outweighs the economic value of the event by a factor of -7.4 for sell orders and +4.4 for buy orders over a short-span trading window. In the case of sell orders, a high proportion of the abnormal return is already realized before the event, which indicates informed trading in the form of arbitrage or frontrunning via Miner Extractable Value (MEV). Looking at individual crypto assets, we find a mean reassessment of token value following short sales of up to 0.79% within just one follow-up trade (buy orders up to 0.50%). The findings indicate that price shocks may have a signaling effect but also that market capitalization may be an insufficient metric for assessing the liquidity and valuation of (inefficient) crypto assets. The results suggest multiple challenges for investor protection in decentralized finance (DeFi) markets.
The financial crisis of 2007-08 revealed that centralized finance (CeFi) relying on large, interconnected financial institutions is easily destabilized. Since the crisis, significant regulatory tightening, monetary easing, and new competitors (e.g., fintechs) have created significant pressure on profit margins and CeFi business models. Recently, a new form of financial intermediation that functions independently of centralized intermediaries has emerged, namely decentralized finance (DeFi). DeFi relies on public, permissionless blockchains and uses so-called smart contracts to perform financial services such as borrowing, lending, and trading in a transparent and automated fashion. The paper gives an overview of DeFi and discusses its advantages and disadvantages compared to CeFi. We analyze different scenarios about the future paths of CeFi and DeFi, concluding that a convergence scenario is most likely.
Jan 1, 2022·Proceedings of the ... Annual Hawaii International Conference on System Sciences/Proceedings of the Annual Hawaii International Conference on System Sciences
Martin Brennecke, Tobias Guggenberger, Benjamin Schellinger, Nils Urbach
Countless decentralized finance (DeFi) applications of the past years have suffered from the high volatility and speculative behavior surrounding their underlying crypto assets. While the academic debate has been flourishing in these areas, Decentralized Autonomous Organizations (DAOs) have not received as much attention. This is the case even though they could offer an opportunity to solve some of the underlying problems of existing cryptocurrencies and ecosystems, for example, by providing lower volatility and, thus, exchange rate stability. This paper presents an economic analysis of the MakerDAO, a DAO in DeFi. In doing so, we use a single case study methodology based on existing resources and expert interviews. It also uses monetary theory instruments to provide researchers and developers with insights into how DAOs are governed. Further, it serves to illustrate how IS research may support the development of future IT artifacts aimed at offering the infrastructure for DeFi applications.
Cryptocurrencies and decentralized finance (DeFi) are reshaping how value is created, exchanged, and governed, and this chapter positions them as more than speculative instruments by reading them as an emerging financial infrastructure. In an ideal digital economy, programmable money supports low-friction transactions, broad participation, and transparent rules, while users retain control without surrendering trust to dominant intermediaries. Yet that ideal remains unevenly realized: markets still absorb extreme volatility, smart contracts still fail under adversarial conditions, and regulatory responses still oscillate between accommodation and restriction, leaving innovation and consumer protection in tension. Prior scholarship has mapped the monetary properties of Bitcoin as a scarcity-driven “digital store of value,” and it has framed Ethereum as the computational base layer that makes smart contracts—and therefore DeFi—possible. Studies on decentralized exchanges, lending protocols, automated market makers, and liquidity incentives have shown how 328 intermediated functions can be replicated through code, but they have also documented exploit patterns, oracle manipulation, governance capture, and composability risks that propagate across protocols. What remains underdeveloped is an integrated account that connects asset design, protocol architecture, and institutional constraints into a single explanatory model. To address this gap, the study advances a sociotechnical framework that links blockchain trust primitives with financial intermediation theory. By tracing how cryptocurrencies supply liquidity and collateral to DeFi, while DeFi amplifies token utility and systemic exposure, the chapter clarifies the conditions under which decentralized finance can mature into a resilient, inclusive financial ecosystem.
A currency's essential feature is to be a medium of exchange. We leverage a quasi-natural experiment-El Salvador as the rst country to make bitcoin legal tender-to study a cryptocurrency's potential to be used in daily transactions. The government also launched and provided incentives to download and use a digital wallet named Chivo, which shares features with Central Bank Digital Currencies (CBDCs) and allows users to trade bitcoin and dollars. Were Chivo Wallet and bitcoin actually adopted after this "big push"? Conducting a representative face-to-face survey and relying on blockchain data to obtain all Chivo transactions, we document how usage of digital payments and bitcoin is low, concentrated, and has been decreasing over time. We nd that privacy concerns are key barriers to adoption, which speaks to a policy debate on crypto and CBDCs that has had anonymity at its core. We also estimate the technology's adoption cost and its network externalities.
In the last decade as a result of the changes in business landscape new payment systems have evolved. Some of the Consumers, business stakeholders, investors and individuals turned to different types of payment systems and virtual currencies for various reasons. Peer to peer architectured Bitcoin which uses a blockchain mechanism is one of these approaches that found place in our lives. In this study, a leading indicator focused data mining methodology has been followed in analyzing Bitcoin market value and bitcoin valuation. Several classification and clustering algorithms applied to the data following a literature review, pre-processing of the data and conceptual framework formation. Finaly performances of these supervised and unsupervised machine learning techniques with rules discovered have been compared, assessed and presented for this type of problem and research domains.