Smart contracts on the Ethereum blockchain can be utilized as secure places to store cryptocurrency if they are designed carefully. However, while cryptocurrency is kept in smart contracts, such as being paid to a blockchain service, no extra profit is generated. The time value of cryptocurrency serves only as collateral, which is an issue of capital inefficiency. Therefore, we propose to maximize the time value of cryptocurrency in smart contracts by supplying it to decentralized money markets of Compound to earn supply interest. Furthermore, by utilizing the interest generated, we can mitigate the liquidity risk of Compound and thus do not diminish the flexibility of the original service much. Experiments are conducted to testify the proposed method, and the implementation cost is estimated to be 2.1 US dollars. We also discuss the potential systemic risk in the decentralized finance system.
The present research article shall outline how blockchain technology could be combined with insurance solutions against political risks. Through the definitions and the characterization of the key concepts of traditional insurance law and blockchain technology using case examples of specific political risks, it will be shown, how the insurance coverage of political risks could be achieved through smart insurance contracts in the future.
The reality is that we live in a society where a small group of people thinks they know better than we do and how we should live our lives. They don’t ever seem to realize that the power and wealth they surround themselves with is only possible because of the quiet acquiescence of the majority. They say employment is a record high, but fail to say wages have been going down in real terms for decades. This wall street elites and big head of governments and pharmaceutical businesses constantly keep telling the general population how great everything is but deep down we all know it’s not true as Recent estimates for global poverty are that 8.6 percent of the world, or 736 million people, live in extreme poverty on 1.90 dollars or less a day, according to the World Bank but we know in our bones it’s not true. But it could be and through technology, it will be. As the only answer to political and financial problems that assail us is to step outside the circus. That’s where cryptocurrencies come in, as they offer a secure form of transferring or recording ownership of our assets and the most important part is they function completely independently of governments. Whether you are with or against them cryptocurrencies represent one of the biggest bull markets in the history of finance and it’s the only boom that comes close to the California gold rush. So as a future Muslim Moroccan scientific researcher in the field of Cybersecurity and block-chain technology I couldn’t help but wonder how could we use this technology in my country to revolutionize the banking and Financial sector in it and especially after I learned that Morocco prohibited the use of bitcoin back in 2017. I then found myself asking the following questions: how does cryptocurrency conform to sharia’s Islamic teaching especially in Morocco? And how could the use of cryptocurrencies send shock waves across the Middle East?
Lewis Gudgeon, Sam M. Werner, Daniel Pérez, William J. Knottenbelt
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.
The Ethereum Blockchain is home to an alternative financial infrastructure. It is implemented in a highly transparent , trust-minimizing and interoperable way. In particular, everything is built on smart contracts and protocols are composable (meaning, that they may freely interact with each other). Moreover, there is no need for trusted third parties, such as custodians or central clearing houses - at least in theory. In reality, most Decentralized Finance protocols are subject to severe dependencies and centralized governance processes. The focus seems to have shifted towards interoperability and away from trust-minimization. Consequently, Decentralized Finance is starting to look a lot like open banking, or to be more precise, an actual realization of open banking's long-term vision.
The advent of Web 3.0, characterized by decentralized technologies such as blockchain, smart contracts, and decentralized finance (DeFi), is reshaping the global financial ecosystem. India, or Bharat, as it progresses towards becoming a developed economy, stands at a crossroads in its financial evolution. DeFi promises transparency, efficiency, and inclusivity, potentially offering solutions to longstanding issues in India's traditional financial infrastructure, such as limited access to banking services and inefficiencies in cross-border transactions. However, the decentralized nature of Web 3.0 also presents challenges, particularly regarding regulatory oversight, consumer protection, and financial stability. The need for a robust regulatory framework is critical to balance innovation with security. This abstract explores the potential of DeFi to accelerate India's financial inclusion goals while emphasizing the importance of regulatory policies to mitigate risks such as fraud, money laundering, and volatility. By analysing global case studies, existing Indian policies, and the trajectory of Bharat's financial sector, this paper aims to provide insights into how regulators can craft a forward-looking framework for DeFi. The goal is to support innovation while ensuring that India's financial evolution through Web 3.0 is sustainable, secure, and inclusive for all citizens, contributing to its vision of becoming a developed economy.
An economic analysis of what distributed ledgers can do, examining key components and discussing applications in both developed and emerging market economies. Distributed ledger technology (DLT) has the potential to transform economic organization and financial structures. In this book, Robert Townsend steps back from the hype and controversy surrounding DLT (and the related, but not synonymous, innovations of blockchain and Bitcoin) to offer an economic analysis of what distributed ledgers can do and a blueprint for the optimal design and regulation of financial systems. Townsend examines the key components of distributed ledgers, discussing, evaluating, and illustrating each in the context of historical and contemporary economies, reviewing featured applications in both developed economies and emerging-market countries, and indicating where future innovations can have large impact. Throughout, Townsend emphasizes the general equilibrium impact of DLT innovations, the welfare gains from these innovations, and related regulatory innovations. He analyzes four crucial components of distributed ledgers—ledgers as accounts, e-messages and e-value transfers, cryptography, and contracts—assessing each in terms of both economics and computer science, and forges some middle ground. Relatedly, Townsend highlights hybrid systems in which some of these components allow useful innovation while legacy or alternative pieces deal with the problem of scale. The specific applications he analyzes include an intelligent financial automated system that provides financial services to unbanked and under-banked populations, and cross-border payments systems, including financial systems that can integrate credit and insurance with clearing and settlement. Finally, Townsend considers cryptocurrencies, discussing the role and value of tokens in economies with distributed ledger systems. The open access edition of this book was made possible by generous funding from Arcadia – a charitable fund of Lisbet Rausing and Peter Baldwin.
Daniel Pérez, Sam M. Werner, Jiahua Xu, Benjamin Livshits
The trustless nature of permissionless blockchains renders overcollateralization a key safety component relied upon by decentralized finance (DeFi) protocols. Nonetheless, factors such as price volatility may undermine this mechanism. In order to protect protocols from suffering losses, undercollateralized positions can be liquidated. In this paper, we present the first in-depth empirical analysis of liquidations on protocols for loanable funds (PLFs). We examine Compound, one of the most widely used PLFs, for a period starting from its conception to September 2020. We analyze participants' behavior and risk-appetite in particular, to elucidate recent developments in the dynamics of the protocol. Furthermore, we assess how this has changed with a modification in Compound's incentive structure and show that variations of only 3% in an asset's dollar price can result in over 10m USD becoming liquidable. To further understand the implications of this, we investigate the efficiency of liquidators. We find that liquidators' efficiency has improved significantly over time, with currently over 70% of liquidable positions being immediately liquidated. Lastly, we provide a discussion on how a false sense of security fostered by a misconception of the stability of non-custodial stablecoins, increases the overall liquidation risk faced by Compound participants.
Although technological advances have always been readily adopted into finance, the current wave of technology-enabled financial innovation – driven by advances in data transmission and processing – is notable for its influence on the structure of the provision of financial services. The chapter starts by reviewing the drivers and forms of technology-enabled innovations in financial services. The next section reviews the impact of innovations on the structure of the financial system including competition dynamics between traditional and new financial service providers, including large technology companies. As the business model of large technology companies is based on their capacity to collect and analyze data on their customers (which is fundamental to the provision of financial services) and involves positive network externalities, large technology companies can gain significant market share in financial services. On the other hand, decentralization and disintermediation of financial services may reduce risk exposure of financial intermediaries but systemic risks borne by the real sector may stay unchanged. The potential changes in the financial system structure are then assessed from the point of view of systemic risk, using the framework of intermediate objectives of macroprudential policy developed by the ESRB as a typology of systemic risk. Finally, implications for public policy are presented. It is argued that in order to counter systemic risk, an integrated analysis and policy response is warranted, covering the fields of financial stability, competition policy, data and consumer protection. JEL classification: G21, G28, O33, E51.
There have been several 51% attacks on Proof-of-Work (PoW) blockchains recently, including Verge and GameCredits, but the most noteworthy has been the attack that saw hackers make off with up to $18 million after a successful double-spend was executed on the Bitcoin Gold network. For this reason, the Proof-of-Stake (PoS) algorithm, which already has advantages of energy efficiency and throughput, is attracting attention as an alternative to the PoW algorithm. With a PoS, the attacker needs to obtain 51% of the cryptocurrency to carry out a 51% attack. But unlike PoW, the attacker in a PoS system is highly discouraged from launching a 51% attack because he would have to risk losing his entire stake amount to do so. Moreover, even if a 51% attack succeeds, the value of PoS-based cryptocurrency will fall, and the attacker with the most stake will eventually lose the most. In this paper, we propose a predatory, destructive attack on PoS cryptocurrencies. The attacker destroys the PoS cryptocurrency system. Then, using the significant depreciation of cryptocurrency, our method can make a profit from a 51% attack on the PoS cryptocurrencies using the traditional stock market's short selling (or shorting) concept. Our findings are an example to show that the conventional myth that "a destructive attack that destroys the blockchain ecosystem totally will not occur because it is fundamentally unprofitable to the attacker itself" may be wrong.
Abstract This chapter describes how the structure and governance of international trade finance—the oldest domain of international finance—evolved from the Middle Ages until today. Trade finance products initially consisted of idiosyncratic assets issued by local merchants and bankers. The financing of international trade then became increasingly centralized and credit instruments were standardized through the diffusion of the local standards of consecutive leading trading centers (Antwerp, Amsterdam, London). This process of market centralization/product standardization culminated in the nineteenth century when London became the global center for international trade finance and the sterling bill of exchange emerged as the most widely used trade finance instrument. The structure of the trade finance market then evolved considerably following World War I and disintegrated during the interwar deglobalization and Bretton Woods period. The reconstruction of global trade finance in the post-1970 period gave way to the decentralized market structure that prevails nowadays.
After the launch of Bitcoin in 2008 and the subsequent introduction of more than 6,600 cryptocurrencies, a new wave of innovative payment projects is currently on its way, including innovations like Libra - designed as a supranational stable coin - and central bank digital currencies (CBDCs). Various interrelations link these private and public projects. Contrary to the original intentions, Bitcoin has not developed into a widespread means of payments, not the least due to its considerable price volatility. Its most significant contribution could be the "proof of concept" for an innovative, private means of payment outside the conventional monetary system. In contrast, Libra is designed as a rather conventional means of payment with close relations with the existing banking sector, which raises numerous policy questions concerning monetary and financial stability. Central bank digital currencies could be viewed as a public sector response to these private projects to secure central banks' predominant role in the monetary system of the future.
Decentralized Finance (DeFi) suffers from various financial risks nowadays. This paper presents MovER, a novel stablecoin system based on modern risk management, consisting of a diversified collateral framework with corresponding stabilizing/clearing mechanism. Moreover we build a powerful all-round risk evaluation framework on the basis of thought on the probability theory and mathematical statistics.
This chapter sets out the elements of the model proposed in practical detail, explaining how it is envisaged the market would operate in practice. It covers infrastructure of the market; rules for the operation of the distributed ledger; operational mechanisms that will be required, being a mechanism for valuing differences in mitigation value of units from participating jurisdictions and a mechanism to effect transactions; the transactional rules that form part of the regulatory framework; and the participants, on a jurisdictional, cross-jurisdictional and supra-jurisdictional basis.
The emergence of a decentralized peer-to-peer platform that matches lending and borrowing without collateral requirements has called the bank lending and balance-sheet channels for monetary transmission into question. Via a standard New Keynesian macroeconomic model expanded with two-sided platform and group identity, we put forward a novel platform density channel of monetary transmission, which could overshadow the conventional channels. An increase in policy rate, for instance, would instigate a shift toward platform borrowing. Increasing borrowers’ density attracts participation in platform deposits, which in turn further enhances borrowers’ benefit of joining the platform, making liquidity available at decreasing platform loan rates. Business investment and hence the inflation rate gets lifted despite monetary tightening. The implication of platform density channel diminishes, however, when platform borrowings complement bank borrowings, and pose nontrivial risk of default.
The Central Bank of China is testing its Digital Currency Electronic Payment (DCEP) in the cities of Shenzhen, Suzhou, Chengdu and Xunan with the involvement of four large state-owned banks in the ...
Purpose The most prominent and persistent problems of our global monetary system are instability and imbalances. We propose an international monetary model to solve these problems while at the same time move the model closer to Maqāṣid Sharīʿah (objectives of Sharīʿah). We name this an organic global monetary model or abbreviated as OGM. OGM is an international monetary model directly built on the national monetary system of each member country so that the two can co-exist. Design/methodology/approach Model design, theory and literature. Findings The model can eliminate interest rates at the central bank level, create non-tradable international money, and make a more stable international monetary system. Originality/value Original.
Umut Uyar, Göksal Selahatdin Kelten, Tuncay MORALI
Bireysel ve kurumsal yatırımcıların finansal piyasalarda yatırım kararları alırken sıklıkla kullandıkları analizler temel analiz ve teknik analiz şeklinde ikiye ayrılmaktadır. Temel analiz; makroekonomik gidişatı, sektörel gelişmeleri ve spesifik olarak yatırım yapılacak varlığın finansal göstergelerini dikkate alırken, teknik analiz; finansal varlıkların geçmiş fiyat hareketlerinden yola çıkarak bu finansal varlığın gelecekteki fiyat hareketlerini tahminlemeye çalışmaktadır. Teorik altyapısı Dow Teorisine dayanan ve “finansal varlığın geçmiş fiyat hareketleri zamanla tekrarlanacaktır” gibi bir takım varsayımlar barındıran teknik analiz yöntemine göre yatırım kararı alınırken çeşitli indikatörler, osilatörler ve formasyonlar kullanılmaktadır. Bu göstergelerden Hareketli Ortalamaların Yakınsaması/Uzaklaşması (MACD), Bollinger Band (BBand), Göreceli Güç Endeksi (RSI) yatırımcıların sıklıkla kullandıkları göstergeler arasındadır. Bu çalışmada 2014-2018 Bitcoin (BTC) ve Ethereum (ETH) günlük fiyat verileri kullanılarak MACD, BBand ve RSI test edilmiş, BTC ve ETH Al/Sat kararları tahmin edilmeye çalışılmıştır. Çıkan sonuçlar neticesinde kripto paraların yatırımcılara sağlayacağı getiriler hesaplanmıştır. Finansal piyasalarda en fazla işlem gören kripto paraların analiz edildiği çalışmada, yatırım kararlarında teknik analizin ne derece etkili olduğu ve bu yatırımlardan teknik analiz kullanılarak herhangi bir getiri sağlanıp sağlanamayacağı irdelenmiştir. Elde edilen bulgulara göre BBand, RSI ve MACD yöntemleri birbirleri ile çelişkili sinyaller verebilmektedir. Bu nedenle yatırımcıların kullanacakları analiz yöntemine göre kazanç ve kayıplarının farklılaşabileceğini söylemek mümkündür
Abstract The point of departure of this short paper is that, in order to preserve the effectiveness of monetary policy in a world increasingly flooded by private digital currencies, central banks (CBs) will eventually have to issue their own digital currencies. The paper presents two proposals for the implementation of such a currency: A moderate proposal in which only the banking sector continues to have access to deposits at the CB and a radical one in which the entire private sector is allowed to hold digital currency deposits at the CB. The paper contrasts the implications of those two polar paths to a CBDC for the funding of banks, the allocation of credit to the economy, for welfare and for political feasibility. One section of the paper shows that the radical implementation may pave the way toward a narrow banking system and dramatically reduce the need for deposit insurance in the long run. The paper evaluates the relative merits of issuing a currency on a blockchain using a permissionless distributed ledger technology in comparison to a centralized (permissioned) blockchain ledger operated by the CB and concludes that the latter dominates the former in more than one dimension.
Cryptocurrencies have emerged in the last decade as a new asset class unlikely to disappear despite its extraordinary volatility. Futures contracts on Bitcoins were introduced in December 2017 by the Chicago Mercantile Exchange followed by options in January 2020. Our goal in this paper is threefold: (i) present the main features of cryptocurrency spot and derivative markets; (ii) argue that the custody recently granted by large financial institutions to their large customers for their bitcoins shows that Bitcoins are very similar to commodities, allowing the extension to bitcoins of the convenience yield introduced by Working (American Economic Review, vol. 39, 1949, pp. 1254–1262) in the Theory of Storage; (iii) use the prices of options traded on the Deribit Exchange to build the volatility smiles and skews observed at different dates of 2019 for short and long dated maturities and compare them to smiles/skews of equity options.
Zusammenfassung Zahlreiche Zentralbanken planen innerhalb der nächsten Jahre, eigene digitale Zentralbankwährungen einzuführen. Die Blockchain-Technologie kann dafür die technologische Basis darstellen. Zentralbanken experimentieren mit dieser Technologie, um Währungen perspektivisch auf Blockchain-Basis abzubilden. Mögliche Vorteile einer digitalen Zentralbankwährung wären eine höhere finanzielle Stabilität, eine höhere Sicherheit und Effizienz im Zahlungsverkehr und ein höherer Automatisierungsgrad von Geschäftsprozessen. Risiken beständen darin, dass es nach einer Einführung zu einem digitalen Bank Run kommen könnte, dass Banken immens an Bedeutung verlieren könnten und letztlich die Datenschutzproblematik geklärt werden muss.
Digitalization apparently improves the efficiency and flexibility of financial services. In this work, we aim to introduce the Rotation Savings and Credit Association (ROSCA) into electronic commerce. ROSCA is one kind of non-interest lending and called as micro-loaning. The corresponding standards and rules are not severe restricted in comparison with those defined by financial institutions. It is friendly to people whose financial conditions are not so well. In particular, we adopt the smart contract which is a sort of automation technique to fulfill electronic micro-loaning in a solidarity group. Since all specifications of ROSCA are interpreted into functions via a logical transition, the contract content will be automatically implemented once the executing conditions are satisfied. This can significantly result in an effective operation and decrease the transaction cost. Moreover, the reputation strategy is applied to classify players into an appropriate group; thus, leading to mitigating the risk of embezzlement and insolvency.