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Blockchain Economy and Cryptocurrency Markets

Paper Session

Friday, Jan. 4, 2019 2:30 PM - 4:30 PM

Hilton Atlanta, 203
Hosted By: Association of Financial Economists
  • Chair: Eric Ghysels, University of North Carolina

Volatility and Welfare in a Crypto Economy

Fahad Saleh
McGill University


Proof-of-Work (PoW) blockchains possess at least two undesirable characteristics: exceptional price volatility and welfare impairment. Exceptional price volatility arises because PoW implements a passive monetary policy that fails to modulate cryptocurrency demand shocks. Welfare impairment arises because
PoW compensates those updating the blockchain through seigniorage while facilitating free-entry among them. This paper theoretically formalizes the aforementioned points and also examines an alternative blockchain mechanism, Proof-of-Burn (PoB), that induces arbitrarily low volatility with arbitrarily enhanced welfare. PoB implements an active monetary policy that modulates cryptocurrency demand shocks. Further, PoB employs a similar incentive structure as PoW but induces welfare gains by supporting cryptocurrency prices with blockchain updating expenses. This paper demonstrates that PoB maintains desirable PoW-characteristics such as free-entry and a deflationary monetary policy but does so without inducing undesirable PoW-characteristics such as exceptional volatility and welfare losses.

Tokenomics: Dynamic Adoption and Valuation

William Cong
University of Chicago
Ye Li
Ohio State University
Neng Wang
Columbia University and NBER


We provide a dynamic model of cryptocurrencies and tokens that serve as means of payment among (blockchain-based) platform users. Introducing tokens capitalizes future growth because the expected technological progress and popularity of the platform render tokens an attractive store of value, inducing further adoption. We derive the unique equilibrium in continuous-time formulation, and characterize, in addition to the contemporaneous complementarity of users' adoption decisions, an inter-temporal feedback from the interaction between user-base dynamics and token price. The token price depends on user base, platform productivity, agents' transaction needs, and their expectation of token appreciation. We also show that native tokens not only accelerate adoption but also affect user-base and price volatilities. Our model sheds light on the broad issue of asset pricing with user-base externalities.

Initial Coin Offerings: Financing Growth with Cryptocurrency Token Sales

Sabrina T. Howell
New York University & NBER
Marina Niessner
Yale University
David Yermack
New York University & NBER


Initial coin offerings (ICOs) are a significant innovation in entrepreneurial finance. The sale of a blockchain-based digital token associated with a specific platform or venture is a new financing instrument with some parallels to IPOs, venture capital, and pre-sale crowdfunding. We examine the relationship between issuer characteristics and measures of success, with a focus on liquidity, using 453 ICOs that collectively raise $5.7 billion. We also employ proprietary transaction data in a case study of Filecoin, one of the most successful ICOs. We find that liquidity and trading volume are higher when issuers offer voluntary disclosure, credibly commit to the project, and signal quality.
Eric Ghysels
University of North Carolina
Nagpurnanand R. Prabhala
University of Maryland
William Mann
University of California-Los Angeles
JEL Classifications
  • O3 - Innovation; Research and Development; Technological Change; Intellectual Property Rights
  • G1 - General Financial Markets