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Decentralized Finance

Paper Session

Saturday, Jan. 7, 2023 10:15 AM - 12:15 PM (CST)

Hilton Riverside, Grand Salon B Sec 12
Hosted By: American Economic Association
  • Chair: Kose John, New York University

Inclusion and Democratization Through Web3 and DeFi? Initial Evidence from the Ethereum Ecosystem

Lin William Cong
,
Cornell University
Ke Tang
,
Tsinghua University
Yanxin Wang
,
Xi’an Jiaotong University
Xi Zhao
,
Xi’an Jiaotong University

Abstract

Web3 and DeFi are widely advocated as innovations for greater financial inclusion and democratization. We assemble (and share) the most comprehensive data from Ethereum, the largest Web3 ecosystem, to conduct an initial investigation using large-scale computing. We describe its network structure, time trends, and distributions of transactions, mining, and ownership. Mining and ownership of Ether are concentrated in exchanges and a few individual nodes. Network activities evolve from peer-to-peer to user-DApps/DeFi interactions, with significantly more transactions by large players. Moreover, high percentage transaction fee, congestion-induced fluctuation of gas prices, suboptimal reserve setting, and large return volatility of tokens present particular challenges for small, poor, unsophisticated, and new nodes in the network, not to mention that the high failure rates hurt all nodes. We also present evidence that base-fee burning mechanisms (e.g., EIP-1559) and airdrop programs (e.g., OmiseGo Airdrop) facilitate inclusion through token monetary redistribution.

Battle of the Bots: Flash Loans, Miner Extractable Value and Efficient Settlement

Alfred Lehar
,
University of Calgary
Christine Parlour
,
University of California-Berkeley

Abstract

Settlement on decentralized ledgers enables flash loans - loans that are both originated and repaid within the same instant of settlement time. We document empirically that these are used primarily for arbitrage. The settlement also allows settlement agents to expropriate profitable arbitrage trades. We show theoretically and empirically that private settlement emerges endogenously as a mechanism to mitigate this expropriation. We document payments from arbitrageurs to private settlers that exceed 1 million USD per day. In a simple model, we characterize the socially optimal mix of private and public settlement.

The Dark Side of Decentralized Finance: Evidence from Meme Tokens

Tao Li
,
University of Florida
Donghwa Shin
,
University of North Carolina-Chapel Hill
Chuyi Sun
,
University of North Carolina-Chapel Hill
Baolian Wang
,
University of Florida

Abstract

Technological innovations in decentralized finance have reduced the cost of listing and trading cryptocurrencies, resulting in a proliferation of meme tokens. Using novel blockchain data, we document issuance of more than 300,000 meme tokens in 2021, with total trading volume of more than $30 billion. Words related to animals (e.g. Doge), cartoons (e.g. Spongebob), and celebrities (e.g. Elon Musk) have been featured in token names. Exploiting the rich heterogeneity of such keywords, we find that investors’ interests shift between distinct meme styles, which we define as tokens sharing the same meme keywords. Token issuers cater to investor demand by issuing more tokens with popular meme keywords and profit from such issuances, primarily through exit scams (e.g. “rug pulls”). Consistent with salience theory’s prediction for competitive markets, issuers compete for investor attention by issuing tokens that feature more meme keywords and lower prices.

Contract Enforcement and Decentralized Consensus: The Case of Slashing

Zhiguo He
,
University of Chicago
Jiasun Li
,
George Mason University

Abstract

Many new blockchain applications rely on the “stake-and-slash” mechanism to align incentives. We point out that the design of such “contracting” problems can not be detached from the details of the decentralized consensus formation process. To illustrate our theoretical argument, we empirically investigate Ethereum 2.0, an ongoing upgrade of Ethereum to a proof-of-stake system. Based on data from Beaconcha.in, the leading Ethereum 2.0 explorer, we find that more than 75% of Byzantine actions have dodged penalty (slashing). Ongoing research will further investigate whether the finding reflects flaws in Ethereum 2.0's incentive design or bugs from the major blockchain explorer.

Discussant(s)
Andreas Park
,
University of Toronto
Agostino Capponi
,
Columbia University
Kose John
,
New York University
Gerry Tsoukalas
,
Boston University
JEL Classifications
  • G0 - General