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  5. Advances in the Economic Theories for Blockchains and Web3
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Advances in the Economic Theories for Blockchains and Web3

Paper Session

Friday, Jan. 6, 2023 2:30 PM - 4:30 PM (CST)

Hilton Riverside, Chart B
Hosted By: American Economic Association
  • Chair: Hanna Halaburda, New York University

An Economic Model of Consensus on Distributed Ledgers

Hanna Halaburda
,
New York University
Zhiguo He
,
University of Chicago
Jiasun Li
,
George Mason University

Abstract

In recent years, the designs of many new blockchain applications have been inspired by the Byzantine fault tolerance (BFT) problem. While traditional BFT protocols assume that most system nodes are honest (in that they follow the protocol), we recognize that blockchains are deployed in environments where nodes are subject to strategic incentives. This paper develops an economic framework for analyzing such cases. Specifically, we assume that 1) non-Byzantine nodes are rational, so we explicitly study their incentives when participating in a BFT consensus process; 2) non-Byzantine nodes are ambiguity averse, and specifically, Knightian uncertain about Byzantine actions; and 3) decisions/inferences are all based on local information. The consensus game then resembles one with preplay “cheap talk" communications. We characterize all equilibria, some of which feature rational leaders withholding messages from some nodes in order to achieve consensus. These findings enrich those from traditional BFT algorithms, where an honest leader always sends messages to all nodes. We study how the progress of communication technology (i.e., potential message losses) affects the equilibrium consensus outcome.

Smart Contracts and the Coase Conjecture

Thomas Brzustowski
,
London School of Economics
Alkis Georgiadis-Harris
,
University of Bonn
Balazs Szentes
,
London School of Economics

Abstract

This paper reconsiders the problem of a durable-good monopolist who cannot make intertemporal commitments. The buyer’s valuation is binary and his private information. The seller has access to dynamic contracts and, in each period, decides whether to deploy the previous period’s contract or to replace it with a new one. The main result of the paper is that the Coase Conjecture fails: the monopolist’s payoff is bounded away from the low valuation irrespective of the discount factor.

Fundamental Pricing of Utility Tokens

Julien Prat
,
French National Centre for Scientific Research and CREST-Ecole Polytechnique
Vincent Danos
,
French National Centre for Scientific Research and École Normale Supérieure
Stefania Marcassa
,
University of Cergy-Pontoise

Abstract

We explain how to evaluate the fundamental price of utility tokens. Our model endogenizes the velocity of circulation of tokens and yields a pricing formula that is fully microfounded. According to our approach, tokens are valuable because they have to be immediately accessible when the platform service is needed, a requirement that is reminiscent of the cash-in-advance constraint in the theory of money.

Vampire Acquisitions

Scott Kominers
,
Harvard University
John Hatfield
,
University of Texas-Austin

Abstract

Firms often find it valuable to lock in repeat customers, particularly those with inelastic demand; they often do so via rewards programs such as frequent-flyer miles or discounts for returning customers. Meanwhile, competitors find it valuable to identify those customers and convince them to switch, in what are called “vampire attacks”—and doing so is much easier in the context of Web3 firms because their transactions are recorded on a public blockchain ledger. We present a model of such vampire attacks to understand their effect on pricing for repeat and non-repeat customers. We find that when repeat customers are easier to identify pricing for those customers becomes more competitive but the effect on non-repeat customers is ambiguous. This implies that Web3 firms likely face competitive pressures that more traditional firms do not.

Discussant(s)
Alessandro Bonatti
,
Massachusetts Institute of Technology
Shunya Noda
,
University of Tokyo
Andrea Canidio
,
IMT School for Advanced Studies Lucca
Bryan Routledge
,
Carnegie Mellon University
JEL Classifications
  • D8 - Information, Knowledge, and Uncertainty
  • D4 - Market Structure, Pricing, and Design