Abstract Permissionless blockchains require a protocol to generate consensus. Many prominent permissionless employ Proof-of-Work (PoW) for that purpose, but PoW possesses significant shortcomings. Various alternatives have been proposed. This paper provides the first formal economic model of most famous alternative, Proof-of-Stake (PoS), and establishes conditions under which PoS generates A sufficiently modest reward schedule not only implies existence an equilibrium in consensus obtains as...

Permissionless blockchains require a protocol to generate consensus. Many prominent permissionless employ Proof-of-Work (PoW) for that purpose, but PoW possesses significant shortcomings. Various alternatives have been proposed. This paper provides the first formal economic model of most famous alternative, Proof-of-Stake (PoS), and establishes conditions under which PoS generates A sufficiently modest reward schedule not only implies existence an equilibrium in consensus obtains as soon...

Do the rich always get richer by investing in a cryptocurrency for which new coins are issued according to proof-of-stake (PoS) protocol? We answer this question negative: Without trading, investor shares martingales that converge well-defined limiting distribution and, hence, stable long run. This result is robust allowing trading when investors risk neutral. Then, have no incentive accumulate and gamble on PoS protocol but weakly prefer not trade. paper was accepted Kay Giesecke, finance.

We construct an economic framework for understanding the incentives of participants a permissioned blockchain supply chains and other related industries. Our study aims to determine whether adoption is socially beneficial such arises in equilibrium. find that reduces information asymmetry consumers, thereby enhancing consumer welfare. Consumer welfare gains can be sufficiently large beneficial; nonetheless, we does not arise This situation because costs are borne by manufacturers,...

We survey extant literature on the economics of blockchain fundamentals, with particular focus Bitcoin, proof-of-work, and proof-of-stake. formally clarify Bitcoin's economic significance in solving double-spending problem without a centralized entity. then transition to literature, highlighting key endogenous interactions among participants Bitcoin ecosystem as well proof-of-stake other potential consensus algorithms. Along way, we discuss various that provides important insights regarding...

We explain the mechanics of smart contracts. then highlight benefits contracts, such as overcoming commitment problems. also discuss limitations, difficulty for contracts to access information external blockchain and integrating contract code with traditional legal enforcement. further how absence a trusted intermediary inflates implementation costs applications. conclude discussion most prominent applications in decentralized finance: token issuance (e.g., initial coin offerings,...

This paper provides an empirical overview of the largely unexplored public blockchain ecosystem. Our highlights that only a few blockchains dominate ecosystem although no single blockchain, not even Bitcoin, dominates uniformly. We explain our findings with simple theoretical framework establishes three key economic attributes - adoption, scale, and security as determinants user utility. examine each along those dimensions empirically. Comparing across these attributes, we establish whether...

We demonstrate that increasing trading fees at a decentralized exchange (DEX) can increase DEX volume. This result arises due to the fact higher endogenously reduce price impact of DEX, thereby reducing overall cost and driving activity from competing exchanges. The referenced relationship between impacts because DEXs employ mechanical pricing rule whereby with inventory level, acquire by offering fee revenue in for capital investors used finance inventory. When are sufficiently low,...

We examine a supply chain with single risk-averse manufacturer who purchases from suppliers and sells to consumers. Within this context, we focus on two channels that drive blockchain adoption by the manufacturer: risk aversion consumer information asymmetry. Regarding first channel, enables efficient tracing of defective products so can selectively recall rather than conducting full recall. This ability reduces involved in purchasing multiple thereby leads endogenously diversify across when...

We study lending in decentralized finance facilitated by a programmable interest rate rule set Protocol for Loanable Funds (PLF). PLFs suffer disadvantage when compared to traditional platforms, given their inability incorporate off-chain information into the borrowing and rates that they set. For this reason, pre-determined PLF function, DeFi equilibrium is sub-optimal competitive market equilibrium. nonetheless show an optimally designed function able generate rates, therefore welfare,...

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We explain the mechanics of smart contracts. then highlight benefits contracts such as overcoming commitment problems. also discuss limitations difficulty for to access information external blockchain and integrating contract code with traditional legal enforcement. further how absence a trusted intermediary inflates implementation costs applications. conclude discussion most prominent applications in Decentralized Finance (DeFi): token issuance (e.g., ICOs, NFTs), decentralized exchanges...

We develop an economic model of a decentralized exchange with concentrated liquidity (e.g., Uniswap v3 and v4), particular focus on the economics provision. demonstrate that providing for risky/risk-free asset pool is comparable to investing in covered call, except call option therein sold at intrinsic rather than market value. Hence, when liquidity, providers forgo time premium fees, thus equilibrium provision decreases premium. Finally, we provide expression useful empirical work. This...

Abstract We develop an economic model to compare equilibrium security of Proof-of-Work (PoW) versus Proof-of-Stake (PoS) blockchains. derive general conditions determine when PoW blockchains are more secure than otherwise equivalent PoS and vice versa. Applying real-world parameter values these conditions, we demonstrate that Furthermore, PoS’s advantage over is particularly salient for high-scale (JEL G0, O3)

This article presents a method for quickly testing the strength of plastic gears, focusing on using 3D printing with continuous fiber reinforcement to improve durability. A model gear was designed and tested wear fatigue under different loads. The tests showed that reinforcing gears carbon increases their strength, especially moderate However, teeth may fail higher study also emphasizes need automated efficiency accuracy.

Proof-of-Work (PoW) blockchains possess at least two undesirable characteristics: exceptional price volatility and welfare impairment. Exceptional arises because PoW implements a passive monetary policy that fails to modulate cryptocurrency demand shocks. Welfare impairment compensates those updating the blockchain through seigniorage while facilitating free-entry among them. This paper theoretically formalizes aforementioned points also examines an alternative protocol induces low enhanced...

This paper examines the economic implications of scaling blockchains under two different consensus protocols: Proof-of-Work (PoW) and Proof-of-Stake (PoS). We study an model whereby agents can store wealth through blockchain's cryptocurrency but may face a costly delay when liquidating due to finite transaction rate. Agents expedite processing by paying fees validators. Within such model, we ability malicious agent compromise security blockchain. show how improved alleviates congestion,...

We provide an economic model of a decentralized exchange (DEX) that allows investors to concentrate liquidity within exogenously specified price intervals (e.g., Uniswap V3). demonstrate providing for risky vs. risk-free asset pair any interval is analogous investing in portfolio composed the and asset. The associated weights evolve dynamically such weight declines from unity zero as increases. Notably, we establish DEX provision always sub-optimal investment absence trading fees, even when...

We study the equilibrium level of staking in a Proof-of-Stake blockchain when investors have different trading horizons. find that, contrary to conventional wisdom, levels do not always increase block rewards. Rather, rewards serve as an inflationary transfer from short-horizon cryptocurrency long-horizon investors. Thus, increasing reduces investment which, under certain conditions, overall and therefore well. When this is case, decreases total which leads reduction value staked cryptocurrency.