Saturday, Jan. 5, 2019 8:00 AM - 10:00 AM
- Chair: Antoinette Schoar, Massachusetts Institute of Technology
Blockchains, coordination and forks
AbstractBlockchains are distributed ledgers, operated within peer-to-peer networks. If reliable and stable, they could offer a new, cost effective way to record transactions, but are they? We model the proof-of-work blockchain protocol as a stochastic game and analyse the equilibrium strategies of rational, strategic miners. Mining the longest chain is a Markov perfect equilibrium, without forking, in line with Nakamoto (2008). The blockchain protocol, however, is a coordination game, with multiple equilibria. There exist equilibria with forks, leading to orphaned blocks and persistent divergence between chains. We also show how forks can be generated by information delays and software upgrades. Last we identify negative externalities implying that equilibrium investment in computing capacity is excessive.
An Economic Analysis of the Bitcoin Payment System
AbstractAbstract Although radically different from a traditional payment system, Bitcoin is functional and transmits value over the internet. Having fixed transaction processing capacity, it experiences service delays which motivate users to pay for service priority. These fees fund the computer servers (“miners”) which support Bitcoin. This paper models Bitcoin as a platform that intermediates between users and miners. It derives closed form formulas of the fees and waiting times and studies their properties; compares the economics of the Bitcoin payment system (BPS) to that of a traditional payment system operated by a profit maximizing firm; and suggests protocol design modification to enhance the platform’s efficiency. The appendix describes and explains the main attributes of Bitcoin and the underlying blockchain technology.
Trading and Arbitrage in Crypto-currency Markets
AbstractWe study the efficiency, price formation and segmentation of cryptocurrency markets. We document large, recurrent arbitrage opportunities in cryptocurrency prices relative to fiat currencies across exchanges, which often persist for weeks. Price deviations are much larger across than within countries, and smaller between cryptocurrencies. Price deviations across countries co-move and open up in times of large appreciations of the Bitcoin. Countries that on average have a higher premium over the US Bitcoin price also see a bigger widening of arbitrage deviations in times of large appreciations of the Bitcoin. Finally, we decompose signed volume on each exchange into a common and an idiosyncratic component. We show that the common component explains up to 85% of Bitcoin returns and that the idiosyncratic components play an important role in explaining the size of the arbitrage spreads between exchanges.
- G1 - General Financial Markets