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Blockchain and Cryptocurrencies

Paper Session

Sunday, Jan. 6, 2019 10:15 AM - 12:15 PM

Hilton Atlanta, Salon West
Hosted By: American Finance Association
  • Chair: Andreas Fuster, Swiss National Bank

Blockchain Economics

Joseph Abadi
,
Princeton University
Markus Brunnermeier
,
Princeton University

Abstract

Whether trustworthy record-keeping is better arranged through distributed ledger technology (DLT) or via a centralized intermediary depends on users' ability to detect and respond to misconduct. Blockchains/DLT also rely on miners' competition as miners' free entry rules out any dynamic incentivization via franchise value, the core mechanism the traditional centralized intermediary arrangement relies on. A blockchain is cheaper when intermediary's franchise value is not fragile, e.g. for a too-big-to-fail institution. While blockchains can keep track of transfer of ownership, proper enforcement of possession rights is still needed, except in the case of (fiat) cryptocurrencies.

Initial Coin Offerings and Platform Building

Jiasun Li
,
George Mason University
William Mann
,
University of California-Los Angeles

Abstract

In a typical initial coin offering (ICO), an entrepreneur pre-sells digital tokens which will later serve as the medium of exchange on a peer-to-peer platform. We present a model rationalizing ICOs for launching such platforms: By transparently distributing tokens before the platform operation begins, an ICO overcomes later coordination failures during platform operation, induced by a cross-side network effect between transaction counterparties. Furthermore, a critical-mass requirement that arises from an endogenous same-side network effect during the ICO rationalizes several empirical patterns observed in ICO structures. Our model provides guidance for both regulators and practitioners to discern economically valuable ICOs.

An Equilibrium Valuation of Bitcoin and Decentralized Network Assets

Andrea Buraschi
,
Imperial College London
Emiliano S. Pagnotta
,
Imperial College London

Abstract

We address the valuation of bitcoins and other blockchain tokens in a new type of production economy: a decentralized financial network (DN). An identifying property of these assets is that contributors to the network trust (miners) are compensated in units of the same asset that are used by consumers of network applications, which we call unity. As a result, the overall production (hashrate) that affects network trust and the bitcoin price are jointly determined. We characterize the demand for bitcoins and the supply of resources that secure the network and show that the valuation of bitcoins can be obtained by solving a fixed-point problem and study its determinants. We show that the unity property induces price-hashrate spirals that amplify the price impact of demand and supply shocks vis-à-vis traditional assets.
Discussant(s)
William Cong
,
University of Chicago
Joshua Gans
,
University of Toronto
Maryam Farboodi
,
Princeton University
JEL Classifications
  • G0 - General