Blockchain Papers

Raffaele Ciriello

No abstract is available for this record.

Tai‐Wei Hu

No abstract is available for this record.

Carlos Castro-Iragorri, Julián Antonio Ramírez, Velez, Sebastian

We provide an overview of decentralized protocols like Compound and Aave that offer collateralized loans for cryptoasset investors. Compound and Aave are two of the most important application in the decentralized finance (DeFi) ecosystem. Using publicly available information on rates, supply and borrow activity, and accounts we analyze different elements of the protocols. In particular, we estimate ex-post margins that give a comprehensive account of the cost of financial intermediation. We find that ex-post margins considering all markets are 1% and lower for stablecoin markets. In addition, we estimate quarterly indicators regarding solvency, asset quality, earnings and market risk similar to the ones used in traditional banking. This provides a first look at the use of these metrics and a comparison between the similarities and challenges to our understanding of financial intermediation in these protocols based on tools used for traditional banking.

Hakwan Lau, Stephen D. Tse

In this review, we evaluate the mechanisms behind the decentralized finance\nprotocols for generating stable, passive income. Currently, such savings\ninterest rates can be as high as 20% annually, payable in traditional currency\nvalues such as US dollars. Therefore, one can benefit from the growth of the\ncryptocurrency markets, with minimal exposure to their volatility risks. We aim\nto explain the rationale behind these savings products in simple terms. The key\nto this puzzle is that asset deposits in cryptocurrency ecosystems are of\nintrinsic economic value, as they facilitate network consensus mechanisms and\nautomated marketplaces (e.g. for lending). These functions create wealth for\nthe participants, and they provide unique advantages unavailable in traditional\nfinancial systems. Our review speaks to the notion of decentralized basic\nincome - analogous to universal basic income but guaranteed by financial\nproducts on blockchains instead of public policies. We will go through their\nimplementations of how savings can be channeled into the staking deposits in\nProof-of-Stake (PoS) protocols, through fixed-rate lending protocols and\nstaking derivative tokens, thereby exposing savers with minimal risks. We will\ndiscuss potential pitfalls, assess how these protocols may behave in market\ncycles, as well as suggest areas for further research and development.\n

Giulio Caldarelli, Joshua Ellul

Decentralized Finance (DeFi) takes the promise of blockchain a step further and aims to transform traditional financial products into trustless and transparent protocols that run without involving intermediaries. Similar to how 2017 was the year of ICOs, 2020 was the year of DeFi, with more than fifteen billion dollars of total investments. The decentralized platforms utilize oracles to retrieve asset data from the external world, but their choice and management criteria are often unknown to the end-users. If oracles are poorly selected or managed, the funds of a rising number of investors are inevitably in danger. The issue, known as “the oracle problem”, which makes real-world applications controversial and debated due to the loss of decentralization, had recently drawn attention to DeFi, given the crescent number of related hacks that caused the loss of millions of dollars held in DeFi projects. Through a multivocal approach that considers academic papers, whitepapers, preprints, and opinion posts, this study aims to shed light on the pattern that identifies the oracle problem in DeFi and outline the most promising ways to overcome the related weaknesses. This research supports the view that the oracle problem in decentralized finance bears specific characteristics which require standardization and appropriate economic incentives to be addressed.

Yong Li, Fan Zhang

This paper integrates vertical fiscal imbalance, transfer payments and fiscal sustainability into the framework of Chinese-style fiscal decentralization, and systematically interprets the relationship among them. Then we use the concept of effective fiscal space to quantify fiscal sustainability, and empirically study whether and to what extent the local public finance in China is sustainable, as well as the impact of fiscal vertical imbalance and transfer payment system on local fiscal sustainability. The results show that the current fiscal behaviors of China's local governments are unsustainable, but most of them have sufficient space to establish a positive fiscal feedback mechanism through fiscal adjustment to achieve sustainable development of debt. Moreover, the comprehensive impact of transfer payment on fiscal sustainability is positive, which suggests that the positive effect of transfer payments on governments' fiscal behaviors through incentives and accountability mechanisms and filling fiscal gap is greater than the distorting effect of the moral hazard and “flypaper effect.”

Alfred Taudes, Jakob Hackel, Wolfgang Haunold, Hannes Hermanky

With a view to developing the Eurosystem’s TARGET2-Securities (T2S) system further, we propose a system based on distributed ledger technology (DLT) that covers all major T2S settlement functionalities and investigate it with regard to regulatory compliance, performance, cost efficiency and risk. The system we propose is a federated system comprising European central banks and central securities depositories (CSDs) as node operators. The role of the central banks is to maintain the cash accounts; provide regulatory-approved “smart contract factories” defining workflows for securities issuance, lifecycle management and matching, settlement, auto-collateralization and corporate actions; and perform the oversight function. The CSDs maintain securities accounts, offer notary services for issuers, perform corporate actions, and carry out settlement. CSD nodes collect settlement requests from external trading and clearing systems, forward them to other CSDs for cross-border settlement, bundle them into transaction blocks and prepare the blocks for settlement. The ensuing ledger updates occur via a fully automated consensus process between the central banks. In T2S on DLT, specialized smart contracts provide the flexibility to settle a range of digitally represented assets, define novel workflows – and allow for variable settlement times. Rather than having to conform to a uniform settlement time of T+2, participants can choose among smart contracts that settle within seconds or longer periods of time. This feature is expected to reduce capital costs and, given the DLT-based enforcement of settlement discipline, settlement failures. Apart from conforming to the current regulatory requirements, the DLT framework also enables the central banks and authorized actors to conduct status checks at a granular level and in real time.

Kaihua Qin, Liyi Zhou, Pablo Gamito, Philipp Jovanovic · 5 authors

Financial speculators often seek to increase their potential gains with leverage. Debt is a popular form of leverage, and with over 39.88B USD of total value locked (TVL), the Decentralized Finance (DeFi) lending markets are thriving. Debts, however, entail the risks of liquidation, the process of selling the debt collateral at a discount to liquidators. Nevertheless, few quantitative insights are known about the existing liquidation mechanisms. In this paper, to the best of our knowledge, we are the first to study the breadth of the borrowing and lending markets of the Ethereum DeFi ecosystem. We focus on Aave, Compound, MakerDAO, and dYdX, which collectively represent over 85% of the lending market on Ethereum. Given extensive liquidation data measurements and insights, we systematize the prevalent liquidation mechanisms and are the first to provide a methodology to compare them objectively. We find that the existing liquidation designs well incentivize liquidators but sell excessive amounts of discounted collateral at the borrowers' expenses. We measure various risks that liquidation participants are exposed to and quantify the instabilities of existing lending protocols. Moreover, we propose an optimal strategy that allows liquidators to increase their liquidation profit, which may aggravate the loss of borrowers.

Chengfu Wang, Xiangfeng Chen, Wei Jin, Xiaojun Fan

No abstract is available for this record.

Walter Engert, Ben Siu-cheong Fung

The emergence of digital currencies such as Bitcoin and the underlying blockchain and distribution ledger technology have attracted significant attention. These developments have raised the possibility of considerable impacts on the financial system and perhaps the wider economy. This paper addresses the question of whether a central bank should issue digital currency that could be used by the general public. It begins by discussing the possible motivations for a central bank to issue a digital currency. The paper then sets out a benchmark central bank digital currency (CBDC) with features that are similar to cash. The implications of such a digital currency are explored, focusing on central bank seigniorage, monetary policy, the banking system and financial stability, and payments. Finally, a CBDC that differs from the benchmark digital currency in a significant way is considered.

Bryan Routledge, Ariel Zetlin‐Jones

To date, cryptocurrency prices are volatile and many cryptocurrency developers have adopted ad hoc approaches to stabilize their cryptocurrency price. When these currencies are not 100% backed by other valued assets, part of their price volatility may arise from self-fulfilling expectations of a speculative attack (as in Obstfeld (1996)). We show that an exchange rate policy, which is less than 100% backed and dynamically adjusts in response to traders’ conversion demand eliminates speculative attacks while, under some conditions, preserving much of the desired exchange rate stability. This dynamic exchange rate policy admits a great deal of discretion to and requires commitment by the party implementing the policy. We demonstrate how to implement this policy using the Ethereum network—a smart contract blockchain environment—and how this implementation yields commitment to the policy.

Wenhao Shen

Purpose To describe recent regulatory developments in China on digital renminbi (RMB), initial coin offerings (ICOs), cryptocurrency holdings, cryptocurrency exchanges and blockchain technology. Design/methodology/approach Describes a digital RMB pilot program, seven government agencies’ bans on ICOs and cryptocurrency exchanges, the legality of holding and trading cryptocurrencies in China and the government’s endorsement of blockchain technology. Findings No PRC law or regulation prohibits Chinese investors from holding or trading cryptocurrencies but Bitcoin is defined as a virtual commodity, not a currency. Despite a ban on ICOs and cryptocurrency exchanges, the People’s Bank of China (PBOC) and other government agencies endorse blockchain technology as long as its goal is to service the real economy. Originality/value Expert guidance from lawyer with experience in foreign investment, cross-border mergers and acquisitions, capital markets, fund formation and venture capital and private equity investments in China.

Marco Cucculelli, Martino Recanatini

Building on the fast developing – yet not consolidated – literature on blockchain and the financial system, this paper aims to investigate how Distributed Ledger Technologies (DLTs) may affect the banking sector performance by influencing the efficiency of the securities post-trading process. Three different scenarios have been developed and used as a framework to assess the impact of the adoption of blockchain technologies on the cost reduction in a sample of 12 Global Systemic Banks in Europe. By using DLT systems, the expected savings in the post-trading processes are sizable and mainly concentrated in IT expenditures and wages associated with core post-trade functions. Moreover, DLT systems emerge as a catalyst for innovation in post-trade process, as they improve timing window and data quality.

Raphael Auer, Stijn Claessens

Cryptocurrencies are often thought to operate out of the reach of national regulation, but in fact their valuations, transaction volumes and user bases react substantially to news about regulatory actions. The impact depends on the specific regulatory category to which the news relates: events related to general bans on cryptocurrencies or to their treatment under securities law have the greatest adverse effect, followed by news on combating money laundering and the financing of terrorism, and on restricting the interoperability of cryptocurrencies with regulated markets. News pointing to the establishment of specific legal frameworks tailored to cryptocurrencies and initial coin offerings coincides with strong market gains. These results suggest that cryptocurrency markets rely on regulated financial institutions to operate and that these markets are segmented across jurisdictions.

Kim Holder, Scott M. Niederjohn, William C. Wood

This paper has four chapters. The first chapter serves as an introduction. The second chapter studies the transaction fees in the bitcoin system. The transaction fees and transaction volume in the bitcoin system increase whenever the network is congested and results from a simple VAR show that it is indeed the case. To account for the empirical findings, we build a model where users and miners together determine the transaction fee and transaction volume endogenously. Even though the fluctuating transaction fee mechanism in bitcoin introduces the extra cost of uncertainty to users, a back-of-envelope calculation shows that the cost of using the bitcoin network for transactions is still smaller than the cost of using the current conventional payment system with a fix transaction fee rate. The second chapter studies the time-varying price dispersion among different bitcoin exchanges. We identify the sources of price dispersion using a standard time-varying vector autoregression model with stochastic volatility. The results show that shocks to transaction fees and bitcoin price growth explain on average 20%, and sometimes more than 60%, of the variation of price dispersion. The third chapter studies the relationship between connections and returns in the bitcoin investor network. Using transaction data from the bitcoin blockchain, we reach three conclusions. First, on average, the annualized returns of connected addresses in the network are 20.75% above those of their unconnected peers. Second, returns also differ among those connected addresses. By dividing the connected ad- dresses into ten deciles based on their centrality, we find that addresses in the two most-connected deciles earn higher returns than the other connected addresses. Third, eigenvector centrality is more related than degree centrality to higher returns, implying that quality of connections matters.

Gomathi Shirdi Botla -

The globalization of banking has led to an increase in cross-border financial transactions. However, latency in processing these transactions poses significant challenges due to the physical distance between data centers located across the globe. This latency impacts transaction speed, customer satisfaction, and regulatory compliance. This paper explores the root causes of data transition latency in cross-border banking transactions, highlights current solutions, and proposes innovative approaches to minimize latency. It emphasizes the importance of leveraging edge computing, optimized routing algorithms, and distributed ledger technologies to enhance transaction processing efficiency while maintaining security and compliance standards.

Pierre Schammo

For enthusiasts, distributed ledger technology (DLT) and smart contract technology (SCT) promise a future of frictionless interactions and decentralisation. In practice, however, it is widely acknowledged that this vision faces significant challenges. These include legal challenges, technological challenges, but also implementation challenges. The latter arise because delivering the DLT/SCT vision does not take place in a vacuum, but in a setting populated by existing market actors that operate on the basis of pre-existing technologies and absent an industry-wide layer of standards to support technological change and the vision of frictionless interactions. This article seeks to contribute to the literature interested in implementation challenges. Its aim is two-fold: to examine implementation challenges and to take stock of current market efforts to overcome them. In particular, this article focusses on the efforts of the International Swaps and Derivatives Association (ISDA) and its initiatives to ‘standardise to digitise’. It will show that these initiatives can usefully be examined as an attempt to help the industry coordinate on a common foundational standards layer. However, this article also finds that the success of ISDA’s efforts is by no means certain. Nor are its efforts without raising some concerns.

Jiahua Xu, Nikhil Vadgama

The Internet of Value (IOV) with its distributed ledger technology (DLT) underpinning has created new forms of lending markets. As an integral part of the decentralised finance (DeFi) ecosystem, lending protocols are gaining tremendous traction, holding an aggregate liquidity supply of over $40 billion at the time of writing. In this paper, we enumerate the challenges of traditional money markets led by banks and lending platforms, and present advantageous characteristics of DeFi lending protocols that might help resolve deep-rooted issues in the conventional lending environment. With the examples of Maker, Compound and Aave, we describe in detail the mechanism of DeFi lending protocols. We discuss the persisting reliance of DeFi lending on the traditional financial system, and conclude with the outlook of the lending market in the IOV era.

Mustafa Can SAMIRKAŞ

Ama -almada nemli fiyat dalgalanmalarna sahip kripto paralardan en yksek ilem hacmine sahip olan Bitcoin'in volatilite dinamiklerini tespit etmek iin Bitcoin getirilerinin ykseli/kazandran ve d/kaybettiren rejimleri, rejim gei olaslklar ve rejimde kalma srelerinin tespit

Jiahua Xu, Nazariy Vavryk, Krzysztof Paruch, Simon Cousaert

As an integral part of the Decentralized Finance (DeFi) ecosystem, Automated Market Maker (AMM) based Decentralized Exchanges (DEXs) have gained massive traction with the revived interest in blockchain and distributed ledger technology in general. Most prominently, the top six AMMs -- Uniswap, Balancer, Curve, Dodo, Bancor and Sushiswap -- hold in aggregate 15 billion USD worth of crypto-assets as of March 2021. Instead of matching the buy and sell sides, AMMs employ a peer-to-pool method and determine asset price algorithmically through a so-called conservation function. Compared to centralized exchanges, AMMs exhibit the apparent advantage of decentralization, automation and continuous liquidity. Nonetheless, AMMs typically feature drawbacks such as high slippage for traders and divergence loss for liquidity providers. In this work, we establish a general AMM framework describing the economics and formalizing the system's state-space representation. We employ our framework to systematically compare the mechanics of the top AMM protocols, deriving their slippage and divergence loss functions.

Jiahua Xu, Krzysztof Paruch, Simon Cousaert, Yebo Feng

As an integral part of the decentralized finance (DeFi) ecosystem, decentralized exchanges (DEXs) with automated market maker (AMM) protocols have gained massive traction with the recently revived interest in blockchain and distributed ledger technology (DLT) in general. Instead of matching the buy and sell sides, automated market makers (AMMs) employ a peer-to-pool method and determine asset price algorithmically through a so-called conservation function. To facilitate the improvement and development of automated market maker (AMM)-based decentralized exchanges (DEXs), we create the first systematization of knowledge in this area. We first establish a general automated market maker (AMM) framework describing the economics and formalizing the system's state-space representation. We then employ our framework to systematically compare the top automated market maker (AMM) protocols' mechanics, illustrating their conservation functions, as well as slippage and divergence loss functions. We further discuss security and privacy concerns, how they are enabled by automated market maker (AMM)-based decentralized exchanges (DEXs)' inherent properties, and explore mitigating solutions. Finally, we conduct a comprehensive literature review on related work covering both decentralized finance (DeFi) and conventional market microstructure.

Agostino Capponi, Ruizhe Jia

We investigate the market microstructure of Automated Market Makers (AMMs), the most prominent type of blockchain-based decentralized exchanges. We show that the order execution mechanism yields token value loss for liquidity providers if token exchange rates are volatile. AMMs are adopted only if their token pairs are of high personal use for investors, or the token price movements of the pair are highly correlated. A pricing curve with higher curvature reduces the arbitrage problem but also investors' surplus. Pooling multiple tokens exacerbates the arbitrage problem. We provide statistical support for our main model implications using transaction-level data of AMMs.

Olakunle Alao, Paul Cuffe

The volatile nature of day-ahead electricity markets means that participants often resort to some form of derivative hedging instrument. One such derivative instrument is a Contract-for-Difference (CfD), specifically available to renewable generators in some jurisdictions to enable them to hedge against their price risk. CfD is a bilateral arrangement between a generator selling into, and an offtaker buying out of, a centrally cleared pool market for electricity. In this arrangement, the generator subsidizes the offtaker when the spot price is high; whereas, the offtaker subsidizes the generator when the spot price is low. This establishes a synthetic bilateral electricity transaction, operating in parallel to the pool market. Embracing CfD to hedge against price risk presents new risks such as counterparty credit, margining, third-party, and legal risks. They also incur high costs and possess underlying process risks. Decentralized Finance - an overarching term representing financial services built on top of a public blockchain - seems to present particularly compelling opportunities in electricity derivatives for these reasons. Therefore, we propose a novel Decentralized Finance instrument: a blockchain-based marketplace governed by a smart contract to act as a mediator between stakeholders mutually enrolled in bilateral CfD arrangements. The employed smart contract structure autonomously and irrefutably enforces the terms of the CfD, underpinned by a novel collateralization and settlement mechanism. This novel approach mitigates the hedging-related and underlying process risks of traditional CfD instruments.

Roman Stasi, Silvia Attanasio

Blockchain technology has in recent years gained significant appeal worldwide in view of its potential to transform the way we do business. In this regard, one of the most attractive architectural concepts is the consortium Blockchain, where a group of peers, leveraging a common governance, collaborate to define rules and technology development. A consortium Blockchain is highly beneficial in a setting where multiple organisations operate in the same industry, but it is not immune from challenges, including investment, education and data standardisation. This paper provides an analysis of the evolution of Blockchain and Distributed Ledger Technology (DLT) technologies and the regulatory approach along with a practical case study on the use of Blockchain in the Italian banking sector. This sector has successfully pioneered the use of Blockchain/DLT with a new application, Spunta Banca DLT, for straight-through processing of interbank reconciliation. Finally, challenges, opportunities and important learnings are discussed.