Blockchain Papers

Ariah Klages‐Mundt, Dominik Harz, Lewis Gudgeon, Junyou Liu · 5 authors

Stablecoins are one of the most widely capitalized type of cryptocurrency. However, their risks vary significantly according to their design and are often poorly understood. We seek to provide a sound foundation for stablecoin theory, with a risk-based functional characterization of the economic structure of stablecoins. First, we match existing economic models to the disparate set of custodial systems. Next, we characterize the unique risks that emerge in non-custodial stablecoins and develop a model framework that unifies existing models from economics and computer science. We further discuss how this modeling framework is applicable to a wide array of cryptoeconomic systems, including cross-chain protocols, collateralized lending, and decentralized exchanges. These unique risks yield unanswered research questions that will form the crux of research in decentralized finance going forward.

Tarun Chitra, Alex Evans

As smart contract platforms autonomously manage billions of dollars of capital, quantifying the portfolio risk that investors engender in these systems is increasingly important. Recent work illustrates that Proof of Stake (PoS) is vulnerable to financial attacks arising from on-chain lending and has worse capital efficiency than Proof of Work (PoW) \cite{fanti_pos_econ}. Numerous methods for improving capital efficiency have been proposed that allow stakers to create fungible derivative claims on their staked assets. In this paper, we construct a unifying model for studying the security risks of these proposals. This model combines birth-death Pólya processes and risk models adapted from the credit derivatives literature to assess token inequality and return profiles. We find that there is a sharp transition between 'safe' and 'unsafe' derivative usage. Surprisingly, we find that contrary to \cite{fanti2019compounding} there exist conditions where derivatives can \emph{reduce} concentration of wealth in these networks. This model also applies to Decentralized Finance (DeFi) protocols where staked assets are used as insurance. Our theoretical results are validated using agent-based simulation.

Vijay Mohan

No abstract is available for this record.

Campbell R. Harvey, Ashwin Ramachandran, Joey Santoro

No abstract is available for this record.

Dirk Andreas Zetzsche, Douglas W. Arner, Ross P. Buckley

The emergence of Decentralized Finance (DeFi) signifies a paradigm shift in the financial sector, introducing both unparalleled opportunities and multifaceted challenges. As DeFi continues to redefine traditional financial systems, it becomes vital for stakeholders to grasp the nuances underpinning this evolution, especially the roles of behavioral finance and public policy. This article presents a literature review on financial market regulation, examining the transformative potential of DeFi and its inherent risks, and explores the implications for regulatory frameworks based on behavioral finance. Public policy in the context of DeFi is a delicate balancing act. On one hand, there's the need to protect investors and ensure market integrity. On the other, there's the risk of over-regulating and stifling the very innovations that make DeFi transformative. Policymakers must grapple with these challenges, seeking ways to create regulatory frameworks that are both protective and adaptive. In addressing the question of how to sensibly regulate financial markets in the age of DeFi, the answer may be both straightforward and somewhat counterintuitive: Regulate peers. In a decentralized system where traditional service providers play a diminished role, peers or individual participants may take on functions that are analogous to those of traditional financial operators. Therefore, these peers may find themselves subject to financial market regulations, trade law, tax law, and other applicable statutes, depending on the services they provide, much like platform operators and their obligations.

Brian D. Feinstein, Kevin Werbach

ABSTRACT The meteoric growth of global cryptocurrency markets presents novel challenges to regulators. Some policymakers and scholars warn that regulation will cause trading activity to cross borders into less-regulated jurisdictions—or even smother a promising new financial asset class. Others believe regulatory actions will stimulate activity by providing clarity to market participants. Standing behind this disagreement is a debate about the desirability of either outcome. Some believe that governments should promote development of the cryptocurrency sector within their countries, while others view cryptocurrencies as conduits of illegality and fraud that should be restricted through strict regulation or even outright bans. Yet these debates have, to date, been conducted almost entirely without data concerning the effects of regulation on market activity. As a corrective, in this article we assembled original data on cryptocurrency regulations worldwide and used them to empirically examine movement in trading activity at a number of exchanges following key regulatory announcements. We found that a wide variety of models yielded almost entirely null results. From the creation of bespoke licensing regimes to targeted anti-money-laundering and anti-fraud enforcement actions, as well as many other categories of government activities, we found no systemic evidence that regulatory measures cause traders to flee, or enter into, the affected jurisdictions. These findings at last provide an empirical basis for regulatory decisions concerning cryptocurrency trading. Among other things, they call into question that capital flight or chilling effects should be a first-order concern.

Harsh Singh Chauhan, Jagjeet Jena

The term decentralized finance (DeFi) refers to an alternative financial infrastructure built on top of the Ethereum blockchain. DeFi uses smart contracts to create protocols that replicate existing financial services in a more open, interoperable, and transparent way. This article highlights opportunities and potential risks of the DeFi ecosystem. I propose a multi-layered framework to analyze the implicit architecture and the various DeFi building blocks, including token standards, decentralized exchanges, decentralized debt markets, blockchain derivatives, and on-chain asset management protocols.

Somjai Fongthiwong, Kanokwan Chancharoenchai

บทคดยอ  การศกษาครงนเนนการวเคราะหพฤตกรรมการตดสนใจใชและวเคราะหปจจยทมผลตอความนาจะเปนในการใชเงนสกลดจทลในประเทศไทย โดยใชแบบสอบถามในการเกบรวบรวมขอมลจากกลมตวอยางทรจกเงนสกลดจทลจำนวน 400 ตวอยาง เพอนำมาวเคราะหขอมลสถตเชงพรรณนาดวยคาความถ คารอยละ คาเฉลยเลขคณต และคาเบยงเบนมาตรฐาน ตลอดทงการทดสอบสมมตฐานความสมพนธระหวางกลมตวอยาง โดยการวเคราะหแบบสถตเชงอนมานดวยคาสถต t-test และคาสถต F-test และใชวธการถดถอยโลจสตกในการคำนวณคาผลกระทบสวนเพมทกำหนดระดบนยสำคญทางสถตเทากบ 0.05  ผลจากการศกษาพบวา กลมตวอยางทเคยใชเงนสกลดจทลมากอนมจำนวน 172 คนของจำนวนผตอบแบบสอบถามทงสน 400 คน สวนใหญมวตถประสงคเพอการเกงกำไร และมจำนวน 288 คนทไมเคยใชเงนสกลดจทลมากอน และในอนาคตกลมตวอยางจำนวน 344 คน ตดสนใจทจะใชเงนสกลดจทล โดยใหความสำคญกบความสะดวกรวดเรวในการใชงานมากทสด สำหรบแหลงขอมลทนยมใชในการหาขอมลเกยวกบเงนสกลดจทลมากทสดคออนเทอรเนต โดยแหลงทมระดบความนาเชอถอมากทสดคอ หนวยงานของรฐ ความคดเหนเกยวกบเงนสกลดจทลในภาพรวมใหความสำคญกบปจจยดานความเสยงในระดบมาก ขณะทผลการประเมนคาผลกระทบสวนเพมจากแบบจำลองโลจสตกบงชวา เพศชายและอาชพพนกงานบรษทเอกชน ธรกจสวนตวและอนๆ สะทอนบคลกทชอบการผจญภยมผลใหโอกาสการใชเงนสกลดจทลเพมขนประมาณรอยละ 10 ในขณะทความเชอมนในขอมลเพมโอกาสความนาจะเปนประมาณรอยละ 15 ดงนน รฐบาลหรอหนวยงานทเกยวของควรเนนใหขอมลความรเกยวกบเงนสกลดจทลพรอมทงสงเสรมการใชงานผานแหลงขอมลทมความนาเชอถอ สะดวกและรวดเรว เพอสรางความเชอมน ซงจะนำไปสการตดสนใจใชเงนสกลดจทลใหเปนไปตามวตถประสงคทแทจรงของสกลเงนดจทลตามโลกาภวตนของระบบการเงนโลก คำสำคญ: เงนสกลดจทล สกลเงนทถกเขารหส แบบจำลองโลจสตก ABSTRACT  This study aims to investigate the behaviors and factors affecting the chance of using digital currency in Thailand. Questionnaires were employed to collect the data from people that knew about digital currency. The sample consisted of 400 respondents. The statistics employed in the analysis of the data were percentage, arithmetic mean, and standard deviation. The t-test and F-test and logistic regression analysis were applied to estimate the change in the probability of using digital currency with a 0.05 conventional significance level.  The results of the study revealed that 172 out of 400 respondents used digital currency for speculative purposes and 288 respondents never used digital currency. It was also revealed that 344 respondents intend to use digital currency in the future. The main reason for using it concerns convenience. The Internet is a main channel for obtaining digital currency information, and government agencies were considered the most reliable source. Additionally, risk was seen as the most important factor regarding digital currency. According to the marginal effects obtained from the logit model, it was found that being male, working in a private company, being a business owner and others, and adventurous characteristics, tended to increase the chance of using digital currency at around 10 percent. Moreover, reliable information was a statistically-significant factor in terms of increasing the chance of using digital currency at 15 percent. The Thai government should focus on providing information and promoting reliable sources with real-time updates that are easy to access by the public. In this way, people would be encouraged to use digital currency, and have more confidence in it, according to the globalization of the financial system. Keywords: Digital Currency, Cryptocurrency, Logistic Model

A. A. Makurin

The stages of formation and theoretical background of cryptocurrency have been explored in the article. It has been established that the focus of the operation and use of such a specific financial asset is the protection of cash against the depreciation that occurs during political and economic fluctuations. But this is another kind of modern money, namely, stalk line. The main processes that have taken place in the IT field, which has influenced the further development of the monetary system worldwide have been reflected in the article. There is no unified system in the EU for cryptocurrency transactions. The technologies used to create any kind of cryptocurrency have been researched by the scientists of the advanced countries in the last century. Nowadays, modern blockchain technology is an improvement of the past. Each country has its own peculiarities and approaches to the recognition or non-recognition of cryptocurrency. The problem with the use of modern money is to determine the issuer. Cryptocurrency and electronic money have some things in common and distinctive. It has been determined that the use of cryptocurrency for the purposes of storing savings and payments is gaining popularity despite the problems of economic, tax and legal regulation. The market capitalization of bitcoin is compared with the leading economies of the world. Bitcoin capitalization is found to be higher than some countries' GDP. The basic aspects of cryptocurrency functioning are revealed. The main method of scientific research is the empirical method, which allowed to make several observations on the changing attitude of countries to cryptocurrency. The measurement process made it possible to understand the volume of the bitcoin market. As a result of scientific literature, cryptocurrency as electronic money is found to be a non-personalized payment instrument and is rotated outside the banking system electronically, which is why it implies that the state cannot control this process, which is why national banks of many countries with distrust treat that kind of money. The countries of the world, at their discretion, make changes in tax and legal law.

Reilly White, Yorgos Marinakis, Nazrul Islam, Steven T. Walsh

Cryptocurrencies such as Bitcoin have fascinated technologists and investors alike. They have become prevalent, with over 2,000 Bitcoin-like cryptocurrencies now in use. Most jurisdictions have not regulated cryptocurrencies. Whether existing regulations apply to cryptocurrency turns ultimately on if we classify cryptocurrencies as currencies, securities, or derivatives, or a money services (transfer) vehicle. In this set of exploratory analyses we seek to classify Bitcoin. We utilize a variety of methods to compare aspects of its behavior to: currencies, asset classes such as derivatives, technology-based products and possible technology-based products such as Ether and the security SPY, and speculative financial bubbles. We find that Bitcoin's behavior more closely resembles a technology-based product, an emerging asset class, or a bubble event, rather than a currency or a security; such that it is correct that existing currency and security laws should not apply to cryptocurrencies.

Colin Bamford

Abstract The chapter examines the process of payment, both as a description of the way in which a monetary obligation is discharged, and as a process by which money is transmitted from one person to another. In the former case, the chapter describes the operation of set-off, netting, consolidation of accounts and the operation of running accounts. In the latter case, it deals with the mechanisms for payment in the UK, internationally and at the level of the EU through the TARGET2 system, focusing in each case on the process of clearing through the central bank of the currency concerned. It also discusses Distributed Ledger Technology (DLT) and its use in payment and clearing systems.

Peter Mell

In this work, we investigate how the governance features of a managed currency (e.g., a fiat currency) can be built into a cryptocurrency in order to leverage potential benefits found in the use of blockchain technology and smart contracts. The resulting managed cryptocurrency can increase transparency and integrity, while potentially enabling the emergence of novel monetary instruments. It has similarities to cash in that it enables the general public to immediately transfer funds to a recipient without intermediary systems being involved. However, our system is account-based, unlike circulating bank notes that are self-contained. Our design would allow one to satisfy know your customer laws and be subject to law enforcement actions following legal due process (e.g., account freezing and fund seizure), while mitigating counterparty risk with checks and balances. Funds can thus be transferred only between approved and authenticated users. Our system has on-chain governance capabilities using smart contracts deployed on a dedicated, permissioned blockchain that has different sets of control mechanisms for who can read data, write data, and publish blocks. To enable the governance features, only authorized identity proofed entities can submit transactions. To enable privacy, only the block publishers can read the blockchain; the publishers maintain dedicated nodes that provide access controlled partial visibility of the blockchain data. Being permissioned, we can use a simple consensus protocol with no transaction fees. A separate security layer prevents denial of service and a balance of power mechanism prevents any small group of entities from having undue control. While permissioned, we ensure that no one entity controls the blockchain data or block publishing capability through a voting system with publicly visible election outcomes.

Jiameng Cheng, Yanke Dai

No abstract is available for this record.

Olanrewaju Isola Fatoki, Jedidah Wanjagi

ABSTRACT: The banking sector has undergone tremendous changes in the past decades. This paper seeks to investigate the future of Kenya banks by using cryptocurrency and blockchain technology to mitigate financial risk. A cryptocurrency performs the fundamental function of money, as a medium of exchange. The encryption and decentralization of digital currencies are the most important aspects regarding the applicability of Cryptocurrencies and Blockchain Technology in Kenya. Digital money supports individual investors as opposed to a dominant market player or authority. The fact that no single authority controls cryptocurrencies is the heart of its applicability in Kenya. Digital money is a unifying factor for the world markets defined by growing inequality and financial malpractices. The Kenyan banking system may take advantage of the smart contracts to address the myriad risks owed to the economic actions of the private and public parties. Banks can use the digital money to eliminate intermediaries that often constrain the capacity of the individual traders to enter into contracts. Cryptocurrencies operate on a user-to-user basis to enhance flexibility and control by the individual traders. The use of the technology can help the state to reduce the risk of loss owed to inaccurate authentication and valuation of assets. KEYWORDS: cryptocurrencies, blockchain technology, financial institutions, market risks, Kenia, banking system

Jan Lánský

Cryptocurrencies are one of the greatest technological innovations. Cryptocurrencies are decentralized payment systems in which ownership is demonstrated cryptographically. An overview of ownership of payment units is stored in a data structure called blockchain. Of the thousands of cryptocurrencies, the best known are Bitcoin, Ethereum, Ripple, Litecoin, EOS, Cardano, NEO, Dash, and Monero. In the past, new cryptocurrencies were most often created by modifying the parameters of another cryptocurrency and by launching a new blockchain. Nowadays, new cryptocurrencies are most commonly created as applications on another existing cryptocurrency. Such cryptocurrencies are called tokens. Creating a new cryptocurrency is easy, but its value depends on users’ willingness to pay for its units. If a cryptocurrency loses its users, it becomes worthless. In this article, we analyze over 2,500 cryptocurrencies that are or were previously traded on cryptocurrency exchanges. We have explored the probability that a cryptocurrency will not survive and will be delisted from exchanges. For the different categories of cryptocurrencies according to their previous trading time on exchanges, we have determined the conditional probability of delisting within 1 to 5 years. We found out that the new cryptocurrencies are the riskiest. With the increasing age of the cryptocurrency, the probability of its delisting decreases. <b>TOPICS:</b>Currency, statistical methods, risk management, exchanges/markets/clearinghouses <b>Key Findings</b> • Cryptocurrencies constitute an expanding area for potential participation and investment. Since the first cryptocurrency was created in 2009 (Bitcoin) more than 2,500 cryptocurrencies have been listed on exchanges. • Consider waiting at least a year before buying a new cryptocurrency. More than 70% of cryptocurrencies that become delisted do so in the first year. • Consider waiting five years before buying a new cryptocurrency. Cryptocurrencies that have been trading for five years have a 9% chance of being delisted within one year..

Sina Shahab, Zaheer Allam

Abstract Tradable permit schemes (TPS) are market‐based policy instruments, which are claimed to be more statically and dynamically efficient in achieving their policy objectives compared to the traditional regulatory instruments. However, some researchers argue that the high level of transaction costs associated with these policy instruments might undermine their efficiency. This paper addresses this issue through exploring the use of Blockchain technology in order to lower transaction costs that arise from TPS transactions. More specifically, it identifies the benefits of using Blockchain smart contracts in implementing TPS that include: increasing the amount of relevant information available to interested actors thus reducing uncertainties; reducing the amount of irrelevant information available to interested actors thus decreasing complexities; correcting information asymmetries among the actors involved thus limiting opportunistic behaviours; lowering the need for the involvement of intermediaries thus decreasing direct monetary costs; and facilitating the linkage between buyers and sellers thus improving trading quality. These potential benefits can increase the efficiency of TPS by decreasing policy‐related transaction costs.

Vincent Furrer, Klaus-Georg Deck

Zusammenfassung Dieser Beitrag stellt die Grundsätze von auf Smart Contracts und der Blockchain-Technologie basierenden Rating-Verfahren zur Bonitätsbewertung vor. Es werden die technologischen Grundlagen von Blockchain und Smart Contracts erläutert und diskutiert, inwieweit die Finanzbranche im Bereich des Ratings von dieser Technologie profitieren kann. Zunächst werden die Probleme traditioneller Ratingverfahren und deren Akteure thematisiert und anschließend Lösungsansätze aufgezeigt, um diese zu überwinden. Damit zeigt dieser außerhalb der traditionellen Bankdienstleistungen befindliche Anwendungsfall, dass mit der Blockchain-Technologie neue Potenziale für Geschäftsmodelle entstehen, die etablierte Prozesse grundlegend verändern und damit ein weiteres Mosaik zur Disruption der Finanzbranche darstellen können.

Sebastian Schich

Banks as a group have traditionally been considered “special” in the sense of meriting the full set of provisions of the financial safety net. The specific motivations for that view have evolved over time, although it owes more to a specific combination of economic functions performed as opposed to any particular function. These functions include offering transaction accounts redeemable in cash on demand, providing liquidity, and serving as conduits for payments and monetary policy transmission. Recent developments suggest however that almost all of the individual economic functions performed by banks can in fact be provided in unbundled form by Fintech initiatives, in some cases more rapidly, at lower fees, and via more streamlined digital interfaces. One important exception remains monetary policy transmission. For the performance of this function, policy makers and central bankers have reserved a privileged role for banks. A radical departure from the current fractional reserve system would be required to unbundle that function and separate money from the banking system, and some private cryptocurrencies have been proposed with the explicit intent to change the nature of money. So far, the present article concludes such initiatives remain marginal, so that banks as a group remain “special”. This observation owes much to the fact that central banks rely on the capacity of the banking system to create money and provide the economy with adequate liquidity and, despite occasional financial crises, have concluded that the efficiency of the current system outweighs the associated costs.

Alexander Dill

The book’s concluding chapter discusses the challenges to banks’ roles in credit intermediation and payment services posed by FinTech, particularly distributed ledger technology. It argues that although FinTech presents significant risks, it will ultimately not displace banks in these core economic roles. The chapter also highlights the future role of RegTech in enabling banks to establish an effective aggregate risk data and reporting infrastructure that will enable their regulators to simultaneously monitor the potential buildup of risk in individual banks and the financial system as a whole. The chapter ends with the argument that bank regulation is highly path dependent due to the international standard-setting authority of the BCBS and the homogenizing effect of the integrated financial markets. Barring another crisis, the basic structure of financial regulation is not likely to fundamentally change.

Bank of International Settlements, Raphael Auer

The spread of distributed ledger technology (DLT) in finance could help to improve the efficiency and quality of supervision. This paper makes the case for embedded supervision, i.e., a regulatory framework that provides for compliance in tokenised markets to be automatically monitored by reading the market's ledger, thus reducing the need for firms to actively collect, verify and deliver data. After sketching out a design for such schemes, the paper explores the conditions under which distributed ledger data might be used to monitor compliance. To this end, a decentralised market is modelled that replaces today's intermediary-based verification of legal data with blockchain-enabled data credibility based on economic consensus. The key results set out the conditions under which the market's economic consensus would be strong enough to guarantee that transactions are economically final, so that supervisors can trust the distributed ledger's data. The paper concludes with a discussion of the legislative and operational requirements that would promote low-cost supervision and a level playing field for small and large firms.

Rand Kwong Yew Low, Terry A. Marsh

A reduction in cost of traditional financial intermediation was one of the main motivations cited by Satoshi Nakamoto in a 2008 proposal for “… an electronic payment system based on cryptographic proof instead of trust.” We begin here with some back-of-the-envelope calculations of these potential cost savings and benefits from the customer perspective. We then discuss the public blockchain ledger and various solutions to two important problems that are constraints on the public blockchain’s trustless consensus, viz. “mining” costs in proof-of-work and governance issues. We speculate that foreseeable institutional implementations will often involve integration of permissioned blockchains with public blockchains. We then discuss exchanges for trading cryptocurrencies, the second component of the crypto blockchains, and in particular their “teething problems,” along with the evolution of a subset of them into increasingly “industrial strength” entities. We suggest that with a more industrial strength infrastructure in place, self-executing smart contracts are virtually natural counterparts for more traditional passive investment products. We end with a discussion of Security Token Offerings (STOs) and the newer Initial Coin Offerings (ICOs): STOs are an interesting hybrid between the ICOs and traditional IPOs; they could conceivably pave the way to a long-time-coming “direct electronic IPO” market. <b>TOPICS:</b>Currency, indexing exchange-traded, exchanges/markets/clearinghouses <b>Key Findings</b> • A set of crypto exchanges is evolving into institutional-strength entities with law-of-one-price, clearing and settlement, custody services, and user algorithms to deal with <i>fake</i> inflated trade volumes. • Pure public blockchains with well-known “blockchain trilemma” problems like high energy consumption, low performance, governance shortcomings, and no clear “how-to-pay” mechanism for ledger-updating in non-crypto applications are inexorably leading toward hybrid public/permissioned blockchain networks. • Despite their rocky start, STOs and ICOs are leading to direct or electronic IPO markets while smart contracts running on blockchains with securities trading identifiers and data seem ideal vehicles for administering passive investment products.

Carlos Rodrigues, Ana Campina, Graziela Meneghel de Moraes

The existence of cryptocurrency a decade ago is an inescapable reality that at the moment generates a high financial influence at global level, the fact that obliges us to know and to study them. Our questions are essentially at three levels: their acceptance, or not, by the States in the face of the paper-money issued by their Central Banks and how the Private Banks react to this virtual currency created in particular; what actions have Tax Administrations at the global level faced with the wealth they generate and the financial values that move in the real economy. Our study is based on the doctrine that already exists, but mainly financial reports produced by central banks and private banking as well as by tax administrations. Finally, we present our conclusions on the current state of analysis and financial studies of the banking system and tax administrations and, of course, our opinion. Keywords: Cryptocurrency, Bitcoin, fiscal analysis, policies, perceptions.

Nick Cowen

Purpose The purpose of this paper is to explore the possible contributions of blockchain technology to creating new governance structures that facilitate social cooperation. Design/methodology/approach Conceptual analysis with key ideas in new institutional economics and political theory is used in this paper. Findings Blockchain technology provides a new tool through which political entrepreneurs can credibly alienate some of their power within a system of rules that they have established. Originality/value This paper links discussion of blockchain entrepreneurship in commercial markets to research into private governance.

Colleen Baker, Kevin Werbach

Banks and financial institutions have been spending significant sums to explore potential applications of blockchain technology. The financial services industry is among those areas predicted to benefit the most from blockchain use in the years to come. This chapter investigates this prediction after providing a primer on blockchain. It analyses the potential of blockchain to increase efficiencies and to transform business processes in a number of areas within the industry such as the trade life-cycle of securities and of derivatives, payments, traditional financing arrangements, asset management, insurance and corporate governance. It also examines new currencies and cryptoassets, phenomena ultimately enabled by the use of blockchain technology.