This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

« Back to Results

Blockchain and Cryptocurrencies

Paper Session

Saturday, Jan. 4, 2020 10:15 AM - 12:15 PM (PDT)

Manchester Grand Hyatt, Seaport B
Hosted By: American Finance Association
  • Chair: Gerry Tsoukalas, University of Pennsylvania

Bitcoin's Fatal Flaw: The Limited Adoption Problem

Franz Hinzen
,
New York University
Kose John
,
New York University
Fahad Saleh
,
McGill University

Abstract

Bitcoin remains sparsely adopted even a decade after its birth. We demonstrate theoretically that this limited adoption arises as an equilibrium outcome rather than as a transient feature. Our results arise primarily because Bitcoin's design precludes expanding supply as a response to heightened demand. We demonstrate that expanding supply prolongs Bitcoin's consensus process, thereby generating a dilemma. Either supply does not keep pace with demand so that prohibitive delays arise for traditional reasons, or supply keeps pace with demand and prohibitive delays arise due to the prolonged consensus process. In either case, prohibitive delays generate limited adoption as an equilibrium outcome. We also demonstrate that permissioned blockchains may obtain widespread adoption, thereby highlighting the need for research on alternatives to Bitcoin.

Token-Based Platform Finance

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

Abstract

We develop a dynamic model of platform economy where tokens derive value by facilitating transactions among users and the platform conducts optimal token-supply policy to finance investment in platform quality and to compensate platform owners. Even though token price is endogenously determined in a liquid market, the platform's financial constraint generates an endogenous token issuance cost that causes under investment and conflict of interest between insiders (owners) and outsiders (users). The franchise value (seigniorage) incentivizes the owners to buy back and burn tokens out of circulation, reducing token price volatility. Blockchain technology is crucial for token-based platforms because it enables platform owners to commit to predetermined rules of token supply that can significantly improve efficiency by addressing platform owners' time inconsistency and mitigating under-investment.

Equilibrium Bitcoin Pricing

Bruno Biais
,
HEC Paris
Christophe Bisiere
,
Toulouse School of Economics
Matthieu Bouvard
,
McGill University
Catherine Casamatta
,
Toulouse School of Economics
Albert Menkveld
,
VU University Amsterdam

Abstract

We offer an overlapping generations equilibrium model of cryptocurrency pricing and confront it to new data on bitcoin transactional benefits and costs. The model emphasizes that the fundamental value of the cryptocurrency is the stream of net transactional benefits it will provide, which depend on its future prices. The link between future and present prices implies that returns can exhibit large volatility unrelated to fundamentals. We construct an index measuring the ease with which bitcoins can be used to purchase goods and services, and we also measure costs incurred by bitcoin owners. Consistent with the model, estimated transactional net benefits explain a statistically significant fraction of bitcoin returns.
Discussant(s)
David Musto
,
University of Pennsylvania
Emiliano Pagnotta
,
Imperial College London
Zhiguo He
,
University of Chicago
JEL Classifications
  • G2 - Financial Institutions and Services