We investigate the long-term impact of macroeconomic and financial factors on cryptocurrency metrics using both parametric and non-parametric methods. Our analysis examines how these factors influence cryptocurrency prices, market capitalizations, and Bitcoin’s hash rate. The results establish that two key factors, the US dollar and the price of gold, adversely affect Bitcoin and other cryptocurrency metrics, including the prices and market capitalizations of decentralized finance and layer-one protocols. Bitcoin’s hash rate demonstrates greater market sensitivity than its price, with the dollar having a stronger impact on Bitcoin than gold. The dollar primarily affects Bitcoin’s price, whereas gold mainly influences its hash rate. These findings, along with Bitcoin’s properties, support the view of Bitcoin as a digital asset analogous to physical gold, playing a role similar to a substitute for the latter.
Blockchain capacity constraints induce congestion when many users want to transact at the same time, challenging the usability of cryptocurrencies as money. This paper argues that blockchain capacity constraints, coupled with the need to incentivize miners (validators) to maintain blockchain security, lead to low inflation outcomes when cryptocurrencies compete for user demand. If two coins are both used as medium of exchange, a low-inflation coin must experience higher congestion than a high-inflation coin; otherwise demand for the latter is zero. Coin issuers then strategically undercut each other's money growth rates to boost transaction demand, limiting the overall inflation rate of the economy. However, the equilibrium is necessarily inefficient given unrealized gains from trade due to congestion and the cost of maintaining blockchain security.
We propose a "break-even" implied volatility of a decentralized finance (defi) pool. The implied volatility is "break-even" because it is defined by the zero expected profit-and-loss of hedged liquidity providers i.e. by their expected profit (against the "buy-and-hold" benchmark) equaling their expected loss (against the same benchmark): the numerator of Rebalancing Loss a.k.a. Impermanent Loss. It depends only on the time-to-maturity and therefore forms only a curve (as opposed to the traditional surface). Similarly to traditional finance, when implied volatility is higher than realized volatility, option sellers (liquidity providers) are more likely to make money, irrespective of hedging. When approximated, this first-principles definition of implied volatility can be surprisingly (loosely) derived from the square-root market impact empirical rule in traditional finance.
Kose John, Barnabé Monnot, Peter Mueller, Fahad Saleh · 5 authors
We provide comprehensive background regarding the Ethereum blockchain protocol, focusing especially on the economic incentives of participants. We begin by clarifying the transaction life-cycle from the user perspective, explaining how user transactions are submitted and settled on the blockchain. Thereafter, we explain how the Ethereum protocol selects proposers to propose blocks of transactions for inclusion on the blockchain and also attesters to vote for or against those blocks. We discuss both how the Proof-of-Stake protocol is used to select proposers and attesters, and also how the Gasper protocol is used to aggregate attester votes which thereby determine the finalized blockchain. Finally, we discuss how builders, searchers and relays have arisen to support and enhance the Ethereum block production process. Through our discussion, we clarify the economic trade-offs faced by each participant and the associated real-world decision variables for each participant.
The transition toward a decentralized energy infrastructure in the United States is critical to addressing growing concerns over grid instability, energy security, and sustainability. Traditional centralized grids face increasing vulnerabilities due to aging infrastructure, climate-induced disruptions, and rising electricity demand. Decentralized energy systems, including distributed renewable energy sources, microgrids, and energy storage solutions, offer resilience and flexibility but require substantial investment. Public-private partnerships (PPPs) have emerged as a viable mechanism to bridge financing gaps by leveraging governmental support, private sector expertise, and innovative financing models. Digital financial instruments, such as blockchain-based energy trading platforms, green bonds, and tokenized energy assets, are reshaping investment strategies by enhancing transparency, liquidity, and accessibility in the energy market. The integration of decentralized finance (DeFi) in energy investment enables peer-to-peer transactions, reducing reliance on traditional financial intermediaries and fostering community-driven energy projects. Moreover, regulatory frameworks and policy incentives play a crucial role in incentivizing private sector participation and ensuring the scalability of decentralized energy initiatives. This paper examines how the synergy between PPPs and digital financial instruments can drive investment in decentralized energy projects, addressing grid instability challenges in the U.S. By analyzing case studies of successful implementations, policy recommendations, and emerging trends in energy finance, this study highlights the transformative potential of innovative investment models in accelerating the clean energy transition. The findings underscore the necessity of a collaborative, technology-driven approach to secure a resilient, decentralized energy future.
Liquidity pools play a crucial role in stabilizing the value of tokens, especially within the context of decentralized finance (DeFi) ecosystems. One of the primary mechanisms through which liquidity pools contribute to stability is by facilitating an arbitrage mechanism. Buying is made when token is undervalued. On other hand selling is made when it's overvalued. This arbitrage activity is made possible by the existence of liquidity pools, where traders can execute these transactions directly on decentralized exchanges. The constant pressure from arbitrageurs helps to bring the token's value back to its target peg, fostering stability. Furthermore, liquidity pools respond dynamically to changes in supply and demand for the token. As demand for the stablecoin increases, users swap other assets for it, leading to a rise in its price. Conversely, when demand decreases, users swap the stablecoin for other assets, causing its price to decrease. Liquidity pools adjust to these changing dynamics by automatically rebalancing the composition of assets in the pool, aligning with market conditions. This responsive behavior contributes to the stable value of the token, as the liquidity pool adapts to fluctuations in demand and supply. This research has discussed liquidity pool creation process of Two NFT tokens (METANFT, 9NFTMANIA) in world famous decentralized exchanges such as Pancake swap and Icecream swap.
We study the following problem that is motivated by Blockchains where ``miners'' are serially given the monopoly for assembling transactions into the next block. Our model has a single good that is sold repeatedly every day where new demand for the good arrives every day. The novel element in our model is that all unsatisfied demand from one day remains in the system and is added to the new demand of the next day. Every day there is a new monopolist that gets to sell a fixed supply $s$ of the good and naturally chooses to do so at the monopolist's price for the combined demand. What will the dynamics of the prices chosen by the sequence of monopolists be? What level of efficiency will be obtained in the long term? We start with a non-strategic analysis of users' behavior and our main result shows that prices keep fluctuating wildly and this is an endogenous property of the model and happens even when demand is stable with nothing stochastic in the model. These price fluctuations underscore the necessity of an analysis under strategic behavior of the users, which we show results in the prices being stable at the market equilibrium price.
Abstract Without theoretically specifying the future of money as an equivalent commodity of other commodities, it is impossible to reveal the recent role of the emergence of cryptocurrencies, as a reflection of speculative competition increasingly sophisticated in its technological aspect and in response to the abusive use of the spurious competition of the big banks promoting the huge financial bubbles that have haunted the world economy, such as the one unleashed from Wall Street in 2008. The explosive growth of transactions in cryptocurrencies may mean, at some point, in the capitalist economic cycle, the possibility of a new financial bubble, as well as the emergence of new swindles to investors; but valid answers can also come from those actors who until now have had to endure the almost exclusive dominance of the international monetary system by the currency issued by the US government, the main exporter of inflation on a global scale.
Abstract This chapter discusses the additional risks on MLFT that are created by the Metaverse. These two risks as discussed in the introduction are the Non-Fungible Tokens and the anonymity created by the Metaverse. Section 8.1 starts by discussing Non-Fungible Tokens (NFTs) and the specific risk for MLFT. It considers both the risks from a financial aspect as well as the risk it poses for transferring information. Section 8.2 discusses the concept of stateless firms. The construction of the Metaverse makes it possible for firms to remain fully anonymous. Section 8.2 discusses how the risks of these stateless firms can be limited.
This research paper presents a thorough economic analysis of Bitcoin and its impact. We delve into fundamental principles, and technological evolution into a prominent decentralized digital currency. Analysing Bitcoin's economic dynamics, we explore aspects such as transaction volume, market capitalization, mining activities, and macro trends. Moreover, we investigate Bitcoin's role in economy ecosystem, considering its implications on traditional financial systems, monetary policies, and financial inclusivity. We utilize statistical and analytical tools to assess equilibrium , market behaviour, and economic . Insights from this analysis provide a comprehensive understanding of Bitcoin's economic significance and its transformative potential in shaping the future of global finance. This research contributes to informed decision-making for individuals, institutions, and policymakers navigating the evolving landscape of decentralized finance.
Stylianos Asimakopoulos, Marco Lorusso, Francesco Ravazzolo
We develop and estimate a DSGE model to evaluate the economic repercussions of cryptocurrency. In our model, cryptocurrency offers an alternative currency option to government currency, with endogenous supply and demand. We uncover a substitution effect between the real balances of government currency and cryptocurrency in response to technology, preferences and monetary policy shocks. We find that an increase in cryptocurrency productivity induces a rise in the relative price of government currency with respect to cryptocurrency. Since cryptocurrency and government currency are highly substitutable, the demand for the former increases whereas it drops for the latter. Our historical decomposition analysis shows that fluctuations in the cryptocurrency price are mainly driven by shocks in cryptocurrency demand, whereas changes in the real balances for government currency are mainly attributed to government currency and cryptocurrency demand shocks.
In the long run, Bitcoin transaction fees are the only source of revenue for miners. They compete broadly in two main ways: proof of work effort to win blocks; and transaction processing to gather fee rewards into the blocks they win. This paper contributes to existing literature by developing a dynamic model that separates these two functions, and explores implications for aggregate efficiency outcomes. Specifically, when set by free market forces (unrestricted by artificially imposed block size caps), what happens to overall transaction prices and quantities relative to total energy use? When is it worth Stackelberg-leading miners investing in efficiency-improving R&D? What effect does this have on overall efficiency over time? By explicitly separating specialised capital dedicated to SHA256 hashing (for proof of work) from transaction processing capital (for transaction collection and verification), this paper sheds light on these questions. One key conclusion is that miner innovation lowers energy use per transaction over time for elastic enough transaction demand schedules. The more competitors Bitcoin has (existing fiat and data services, and other new Blockchain-based systems), the stronger is this conclusion.
Decentralized exchanges (DEXs) are an essential component of the nascent decentralized finance (DeFi) ecosystem. The most common DEXs are so-called automated market makers (AMMs): smart contracts that pool liquidity and process trades as atomic swaps of tokens. AMMs price transactions with a deterministic liquidity invariance rule that only uses the AMM’s token deposits as inputs and that has no precedent in traditional finance. Yet, in the context of transparent and open blockchain operations, any liquidity invariance pricing function allows so-called sandwich attacks (akin to front running) that increase the cost of trading and threaten the long-term viability of the DeFi ecosystem. Invariance pricing is also not regret free. Linear pricing rules have similar problems except for uniform pricing, which has regret-free prices and limits sandwich attack profits but which invites excessive order splitting. Comparing trading costs using a model of liquidity provision, constant product pricing is often cheaper except when the variance of the underlying asset is small or when the order is large. This paper was accepted by Will Cong, Special Section of Management Science: Blockchains and Crypto Economics. Funding: A. Park received financial support from the Global Risk Institute and the Social Sciences and Humanities Research Council of Canada [Grant 435-2017-0647]. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2021.02802 .
In this paper we try to reflect on how one of the financial phenomena of the last twenty years, namely cryptocurrencies, has been analysed by the scientific community of the Knowledge Management (KM) field. The issue is relevant because the raise of cryptocurrencies as an economic asset has been occurring in a time in which KM gained social prominence. And also because the evolution of cryptocurrencies should be also related to knowledge about their own value. Within this context, we present a literature review on papers that exist in the SCOPUS database about cryptocurrencies and KM. After analysing those papers, the general idea is that KM is very far away from the cryptocurrency phenomenon; the reason may be that it is very difficult to use the more common models available on KM to analyse cryptocurrencies; also the economic and social agents that might be interested in KM are not those who invest in cryptocurrencies; finally, the data available on cryptocurrencies are mostly speculative, and it is very difficult to make any scientific study on them. These conclusions may be of interest for the KM community at large, because they indicate a new subfield of research, and for practitioners, because they mean that there is not much science in the evolution of cryptocurrencies themselves. Finally, for policymakers, the findings mean the expanding the possibility of use of cryptocurrencies in societies may be extremely risky given their volatility and the lack of precise scientific knowledge about them. The paper is original because it relates to concepts that have only very seldom and scarcely put together.
Stablecoin is a medium of exchange with stable value in the world of decentralized finance (DeFi). In which, algorithmic stablecoins are one special type of stablecoins that are not backed by any asset. They stand to revolutionize the way a sovereign fiat operates. As implemented, algorithmic stablecoins are poorly stabilized in most cases; their prices easily deviate from the target or even fall into a catastrophic collapse, and are as a result often dismissed as a Ponzi scheme. However, what is the essence of Ponzi? In this paper, we try to clarify such a deceptive concept and reveal how algorithmic stablecoins work from a higher level. We find that Ponzi is basically a financial protocol that pays existing investors with funds collected from new ones. Running a Ponzi, however, does not necessarily imply that any participant is in any sense losing out, as long as the game can be perpetually rolled over. Economists call such realization as a rational Ponzi game . We thereby propose a rational model in the context of algorithmic stablecoins and draw its holding conditions. We apply the model to examine: whether or not the algorithmic stablecoin is a rational Ponzi game. Accordingly, we discuss two types of algorithmic stablecoins (Rebase & Seigniorage Shares) and dig into the historical market performance of a number of impactful projects to demonstrate the effectiveness of our model.