Research Progress on Blockchain and Cryptocurrency Economics

Source: Management Science, authors, Bruno Biais, Agostino Capponi, Lin William Cong, Vishal Gaur, Kay Giesecke

1. Introduction

Blockchain technology The emergence of crypto-assets represents a major innovation in economic infrastructure. The consensus mechanism introduced by Bitcoin (BTC) and permissionless blockchains fundamentally changes the way participants store and transfer value without a centralized intermediary. The possibilities of new technologies have led to an explosion of experimentation and applications in the fields of (crypto)centralized finance (CeFi), decentralized finance (DeFi) and emerging versions of Web3. However, many design choices and economic properties have been relegated to the back burner in computer science and engineering research. As economies around the world attempt to integrate blockchain-based payment rails and financial infrastructure, this type of academic research remains essential for informed policy and technology design, as well as for augmented infrastructure design. This article reviews current research in this field through 15 MS-specific documents.

2. Existing research

1 .The economics behind the challenges facing tokens

With the collapse of cryptocurrency platforms such as Terra-Luna, FTX and others in 2022 and the targeting of Binance, The crypto industry is facing tremendous pressure due to regulatory lawsuits by Coinbase and others. But these challenges are usually economic rather than technical, involving the centralization and decentralization of blockchain platforms and Web3 applications. Although decentralization is technically possible, it may not be achieved in economic equilibrium. Centralized cryptocurrency exchanges have witnessed the exponential growth of the cryptocurrency market and they currently still dominate the crypto space, with many economic forces behind them leading to vertical integration and centralization. Not only does this go against the idea of ​​blockchain as a form of decentralized consensus, it could also lead to market manipulation. Given the seriousness of these issues, the first part of the special feature contains three articles that explore these fundamental economic issues before the dramatic growth of the industry over the past two years.

Cong et al. (2023) rigorously documented the phenomenon of money laundering transactions on centralized cryptocurrency exchanges for the first time through a systematic method to detect forged transactions. Capponi et al. (2023) further consider miners' investment in hardware and competition for mining rewards in a rent-seeking game, pointing out that centralization grows with the heterogeneity of mining costs, but hardware capacity constraints prevent the most efficient Miners monopolize the mining process. Garratt and Van Oordt (2023) explored the impact of fixed mining costs on proof-of-work (PoW)-based cryptocurrencies, specifically the impact of mining hardware type on the feasibility of profitable double-spending attacks, finding that specialized hardware Cryptocurrencies are less responsive to exchange rate shocks, which helps avoid double-spend attacks.

These studies not only deepen our understanding of cryptocurrency market manipulation, mining industry structure, and hardware production and investment in the process of generating decentralized consensus on blockchain networks The understanding of importance also provided the academic basis for regulatory litigation against multiple crypto exchanges and warned of market manipulation that could result from CeFi entities concentrating power with limited regulation or disclosure requirements, issues that later manifested themselves in the FTX debacle. come out.

2. Fee mechanism, blockchain scalability and smart contracts

Even without the various challenges associated with centralization, lack of regulation, and mining attacks, blockchain systems still face some design issues in achieving scalability while maintaining a decentralized structure. First, without a centralized entity to price products and services, it is unclear what type of fee mechanism distributed networks should adopt to ensure long-term sustainability. The scalability of blockchain and smart contracts is a well-known bottleneck in the industry. Additionally, the economic impact of blockchain and smart contracts is largely unknown. The next three articles in the special topic help fill these knowledge gaps.

Basu et al. (2023) proposed "StableFees", a fee setting mechanism based on uniform price auctions that aims to reduce fee fluctuations and prevent users and miners from manipulate. Benhaim et al. (2023) studied how committee-based consensus (CBC) affects the speed and security of blockchains and found that small committees can improve scalability but may also reduce security. Chen et al. (2023) analyzed the impact of US state laws on the adoption of blockchain technology and found that blockchain technology can help alleviate the problem of contract incompleteness, promote company innovation and reduce reliance on vertical integration.

3. Tokenomics: Entrepreneurial Finance, Governance and Platform Vulnerability

"Tokenomics" is an emerging field that explores the use and valuation of (crypto) tokens. It was originally proposed by Cong et al. (2021) in a 2018 working paper and gradually developed through a series of studies. This area spans theoretical and empirical research, exploring the various types and functions of cryptocurrencies. Blockchain platforms offer new avenues for financing and monetization through the issuance of native tokens that serve as alternatives to traditional convertible securities or equity and fee or commission contracts.

Malinova and Park (2023) point out that although income-based token contracts may be economically inferior to equity, optimally designed token contracts can generate Equity and debt have similar returns. Research by Davydiuk et al. (2023) shows that entrepreneurs mitigate information asymmetry problems by retaining tokens. Shakhnov and Zaccaria (2023) explore how tokens can extract consumer surplus through price discrimination. Barth et al. (2023) analyze the role of analysts in the ICO market and find that their assessments may be biased by interactions. Gan et al. (2023) studied the effectiveness of tokens and platform commissions in overcoming moral hazard. Sockin and Xiong (2023a) discuss the role of cryptocurrencies as utility tokens in facilitating transactions and how token re-tradeability affects the stability of the platform. These studies provide rich insights into the field of token economics, particularly regarding token financing, market signals, network effects, and platform governance.

4. Centralized Finance (CeFi), Decentralized Finance (DeFi) and Crypto Innovation

Despite concerns about the current form of CeFi, an improved CeFi design in a decentralized network may still be sustainable. Apart from cryptocurrency exchanges, CBDCs are one of the most active developments in CeFi (e.g., Auer et al. 2022), while stablecoins and decentralized exchanges are the main applications of DeFi. The last three articles in the special feature explore the evolution of CeFi, DeFi and crypto product innovation and their economic insights.

Chiu and Davoodalhosseini (2023) studied the impact of CBDC on the macro economy and found that cash-like CBDC can promote consumption and welfare better than deposit-like CBDC, and Possible increase in bank intermediation and market share. Park (2023) discussed the conceptual flaws of decentralized automated market makers (AMMs), pointing out that liquidity immutable pricing allows sandwich attacks, increases transaction costs, and threatens the long-term viability of the DeFi ecosystem. Augustin et al. (2023) studied the impact of derivatives on the spot market through the introduction of Bitcoin futures contracts and found that futures contracts help improve price efficiency, market quality and liquidity. These studies provide new perspectives for understanding the economic effects of financial innovation.

3. Future Outlook

1. Blockchain Forensics, Cybersecurity and Regulation

Fintech poses many challenges to the regulation of the financial system. A pressing challenge is how to regulate emerging blockchain-based (CeFi and DeFi) entities relative to traditional financial institutions. While some countries have made progress, the reality is that crypto regulation remains vague or missing in much of the world. Some argue that regulation based on activities rather than entities is desirable in order to level the playing field and ensure that various entities engaged in similar activities receive the same regulatory treatment. Others propose eliminating the industry entirely. Regardless, the importance of both research areas is emerging as regulators around the world increasingly focus on combating crypto market manipulation and cybercrime and launch a range of other regulatory initiatives. The first is the development of statistical analysis and blockchain forensic tools in order to detect and combat the dark side of the industry and ensure market integrity. Research on forensic accounting and finance has proven useful in traditional finance and continues to be useful in CeFi and DeFi (Foley et al. 2019, Cong et al. 2023a, Griffin and Kruger 2023), especially It’s about crypto-related cybercrime and market manipulation. The second is understanding economic incentives to predict equilibrium outcomes and demonstrate “intention” in various regulatory processes, to which many articles contribute. By extension, rigorous economic research is necessary to inform governments and assist regulators in establishing a clear framework to protect investors and consumers from fraud and criminal activity, without becoming so draconian as to Tostifle innovation.

2. Design distributed systems

Taking this protocol design as a given, researchers have been analyzing various equilibrium outcomes for blockchain-based networks (e.g., Halaburda et al. 2022, Amoussou-Guenou et al. 2023). However, there is a growing recognition that these designs may be context-specific and suboptimal. Thus, mechanism design and information design in blockchain and Web3 protocols constitute an area where economists can make unique contributions. Tokenomics design is equally important and requires knowledge of monetary economics, asset pricing, and corporate finance. Exploring various system designs can help obtain information from users (for crowdsourcing and voting, etc.; see, e.g., Benhaim et al. 2023b), improve information recording (e.g., consensus mechanisms), incentivize/coordinate user contributions, and raise Capital (e.g. via ICO).

3. Balance between concentration and decentralization

Go to the center ization is not without costs, nor is it equivalent to permissionless blockchain (Bakos et al. 2021). Decentralization simply for the sake of decentralization is a topic for ideologues and extreme enthusiasts. As economists, we should consider the trade-offs involved. If blockchain and cryptocurrencies are to be promoted, they need an infrastructure as reliable and scalable as the Internet in order to be used for most economic activities. One possible outcome of the co-evolution of CeFi, DeFi and TradFi is that an optimal and sustainable network will combine all their elements. Therefore, in the discussion of how to overcome blockchain scalability challenges (e.g., Buterin 2017, Abadi and Brunnermeier 2022), through local centralization remains very important. Furthermore, formal attempts to introduce Web3 reputation beyond heuristic discussions (Weyl et al. 2022, Tong 2023) remain a promising area where economists can make a unique contribution, given the ongoing debate on ratings, reputation, and contracts. Extensive academic literature. Blockchains that support confidential AMM-based DEXs and solve the problem of various attacks (e.g., sandwich attacks) also require further economic analysis.

4. Learn from data and practice

District Many people outside of the blockchain and cryptoeconomic world complain that blockchain and Web3 are just hype. We should let the facts speak for themselves. More is needed to understand whether this area is becoming a reality or can become a reality. This effort begins by documenting fundamental empirical patterns such as cryptoasset return dynamics (e.g., Liu and Tsyvinski 2021), functionality and classification (Cong et al. 2022a), and impacts on the real economy (Benetton et al. 2023) . With the emergence of non-fungible tokens (NFTs), decentralized applications (DApps), and decentralized autonomous organizations (DAOs), empirical studies that provide researchers with system state information may be valuable (Borri et al. . 2022, Falk et al. 2022). Central bank digital currencies (CBDCs) and stablecoins are perhaps the most promising large-scale applications of blockchain and smart contracts. Although there is a rich theoretical literature on their design and economic principles (e.g., Gorton and Zhang 2023), quantitative or empirical research has only just begun (e.g., Chiu et al. 2023). Another important condition for mass adoption is interoperability – a simple and reliable way for digital assets to be exchanged freely and enabling more industries to integrate blockchain into their daily operations. Furthermore, unlocking the potential of smart contracts, as described by Chen et al. (2023a), requires the flow of value and information between the off-chain and on-chain worlds (possibly via IoT sensors), a discussion of which has only just begun ( e.g., Bakos and Halaburda 2023, Cong et al. 2023d).

5. Applications beyond financial markets

Block Chain applications have transcended the fields of business economics and finance and are gradually emerging in fields such as governance, supply chain, games, and healthcare. Yermack (2017) and Erwin and Yang (2023) explore the application of blockchain in governance and sustainability. Furthermore, blockchain is effectively used to improve supply chain transparency (e.g., Chod et al., Ma et al. 2022), which has implications for blockchain adoption and competition (Sristy 2021, Iyengar et al. 2021 , 2023). Cui and Gaur (2022) discuss how blockchain is different from cryptocurrency networks in supply chain applications and explain the uses of blockchain in supply chains. The authors also present recent success stories and analyze their potential for value creation through company interviews and secondary publications. These applications include process efficiency improvements, supply chain optimization and the creation of new innovative use cases, which vary in ease of implementation and scope of benefits, but all benefit from economic analysis.

6. Data analysis based on blockchain

Blockchain technology provides a promising foundation for secure multi-party computation (MPC), blending transparency and privacy protection. Although blockchain inherently emphasizes transparency, by employing methods such as zero-knowledge proofs, data can be verified and integrated without revealing sensitive information. This technology is particularly important in scenarios where privacy needs to be protected while ensuring data integrity and verifiability.

Early economic research has explored the application and impact of blockchain in areas such as auditing, financial reporting, stability analysis and entrusted investment. In addition, the combination of blockchain with artificial intelligence (AI) and big data analytics can improve performance in content generation, privacy protection, financial inclusion, fraud detection and identity verification.

In addition, AI’s ability to optimize smart contract code may promote more innovation and widespread adoption of blockchain technology. This synergy between AI and blockchain not only enhances the efficiency of secure MPC and decentralized applications (dApps), but also creates favorable conditions for technological advancement and the redefinition of computing paradigms.

The following is a screenshot of part of the article