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Blockchain and Tokenomics

Paper Session

Friday, Jan. 4, 2019 10:15 AM - 12:15 PM

Atlanta Marriott Marquis, L508
Hosted By: Econometric Society
  • Chair: William Cong, University of Chicago

Decentralized Mining in Centralized Pools

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

Abstract

An open blockchain's well-functioning relies on adequate decentralization, yet the rise of mining pools in presumably decentralized mining activities calls into question the stability and viability of such systems. We study two opposing forces in the creation and organization of mining pools: risk-sharing benefits attract miners to pools, leading to centralization; however, cross-pool diversification and endogenous pool fees sustain decentralization. Consequently, aggregate growth in mining pools is not accompanied by over-concentration of pools. In particular, we show that dominant pools charge higher fees, leading to disproportionately less miners to join and thus a slower pool size growth. Empirical evidence from Bitcoin mining supports our model predictions, and the economic insight applies to most proof-of-work- and proof-of-stake-based blockchains.

Cryptocurrencies: Stylized Facts on a New Investible Instrument

Albert Hu
,
University of California-Berkeley
Christine Parlour
,
University of California-Berkeley
Uday Rajan
,
University of Michigan

Abstract

We present stylized facts on the asset pricing properties of cryptocurrencies: summary
statistics on cryptocurrency return properties and measures of common variation for secondary market returns on 222 digital coins. In our sample, secondary market returns of all other currencies are strongly correlated with Bitcoin returns. We also provide some investment characteristics of a sample of 64 initial coin offerings (ICOs).

A Theory of ICOs: Diversification, Agency, and Information Asymmetry

Evgeny Lyandres
,
Boston University
Jiri Chod
,
Boston College

Abstract

We develop a theory of financing of entrepreneurial ventures by Initial Coin Offerings (ICOs).
Consistent with recent regulatory developments, our model views crypto tokens as securities.
Selling tokens, which represent claims to the venture’s future revenue, allows an entrepreneur
to transfer some of the venture risk to diversified investors without diluting her control rights.
This, however, leads to an agency conflict between the entrepreneur and investors that manifests
itself in underinvestment. We show that ICOs can dominate traditional venture capital
(VC) financing when VC investors are under-diversified, when idiosyncratic component of venture
risk is large enough, when the payoff distribution is sufficiently right-skewed, and when the
degree of information asymmetry between the entrepreneur and ICO investors is not too large.
Overall, our model suggests that ICOs can be a viable financing alternative for some but not
all entrepreneurial ventures, and that while regulating ICOs as security offerings is desirable,
banning them outright is not.

Tokenomics: Dynamic Compensation for Decentralized Contribution

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

Abstract

Coin offerings not only represent a novel means for financing platform-based startups, but also provide incentives for early and key contributors such as program developers or expert advisors, especially projects involving decentralized networks. By serving as the means of payment in decentralized networks, tokens facilitate fast adoption and continued advancement, and their price depends on users' transaction needs and expectation of token price change, as well as the network scale. Unlike standard financing, tokens can accelerate user acquisition and compensate dispersed contributors and ensure system continuity beyond founders, without relying on user subsidies or fees. Yet such functions hinge on the design of token supply and distribution. More broadly, tokens can be viewed as an alternative to cash-flow based securities in corporate finance in the age of financial democratization, sharing economy, and on-demand labor.
Discussant(s)
Evgeny Lyandres
,
Boston University
Sabrina T. Howell
,
New York University
Jiasun Li
,
George Mason University
Dmitry Orlov
,
University of Rochester
JEL Classifications
  • E4 - Money and Interest Rates
  • G1 - General Financial Markets