An Analysis of Decentralized Finance and its Applications

Cryptocurrency and blockchain technology are relatively recent economic and technological trends. Within the cryptocurrency sphere a new form of decentralized peer-to-peer finance network has emerged. This is of course Decentralized Finance (DeFi). DeFi is a relatively quick and permissionless financial movement within the greater world of cryptocurrency and blockchain technology. DeFi is built on ideas of easy access, interoperability, transparency, and limited third-party meddling. As such, DeFi and its principles are in clear contrast to traditional financial institutions that value centralized control. The aim of the thesis is to further investigate the technological and financial properties of DeFi and disclose how these relate to the broader aspects of the financial world. The thesis answers key research questions of interest by performing a deep dive into the DeFi sphere. In this thesis the underlying protocols of DeFi is analyzed. This is supplemented by examining and comparing DeFi to traditional financial foundations and values. A comprehensive literature review is explored and summarized to point out the uniqueness of DeFi, in addition to advantages and disadvantages and finally what yet needs to be improved within the sphere. Based on the analysis in this thesis, several findings were made regarding the nature of the decentralized market today. Finally, concluding remarks are provided about DeFi and its greater implication on today’s world and what the future holds for alternative financial options. The research and results show DeFi as a growing movement with real life implications and use cases, but still in its infancy with legislative challenges yet to be properly addressed

Fintech and the future of financial services: What are the research gaps?

New financial technologies (FinTech) have erupted around the world. Consequently, there has been a considerable increase in academic literature on FinTech over the last five years. Research tends to be scantily connected with no coherent research agenda. Signi - cant research gaps and important questions remain. There is much work to be done before this area becomes an established academic discipline. This paper offers coherent research themes formulated through focus group meetings with policymakers and academics, and also based on a critical assessment of the literature. We outline seven key research gaps with questions that could form the basis of academic study. If these are addressed it would help this area become an established academic discipline

Game theory for cooperation in multi-access edge computing

Cooperative strategies amongst network players can improve network performance and spectrum utilization in future networking environments. Game Theory is very suitable for these emerging scenarios, since it models high-complex interactions among distributed decision makers. It also finds the more convenient management policies for the diverse players (e.g., content providers, cloud providers, edge providers, brokers, network providers, or users). These management policies optimize the performance of the overall network infrastructure with a fair utilization of their resources. This chapter discusses relevant theoretical models that enable cooperation amongst the players in distinct ways through, namely, pricing or reputation. In addition, the authors highlight open problems, such as the lack of proper models for dynamic and incomplete information scenarios. These upcoming scenarios are associated to computing and storage at the network edge, as well as, the deployment of large-scale IoT systems. The chapter finalizes by discussing a business model for future networks.info:eu-repo/semantics/acceptedVersio

Fairer, faster, more foreseeable: incentives, throughput and stability of proof of work blockchains

Blockchains employ internal and external incentive structures to influence participant behaviour, maintain network security, and ensure stable throughput. Internal incentives, like block rewards and transaction fees, are embedded within the blockchain design, while external incentives arise from market forces and competition. Both incentive structures are crucial for shaping blockchain behaviour and network efficiency. The primary motivation of this thesis is to examine how misaligned incentive structures can negatively affect stability in Proof-of-Work blockchains, focusing on stable block and transaction throughput. The thesis aims to provide novel insights into the negative impact of unstable throughput on individual agents and the network as a whole. Additionally, it evaluates potential attack vectors resulting from misconstructed incentive structures, past exploits, and proposes fairer and more robust mechanisms to align incentives, ensuring higher throughput stability and network security. The contributions of this thesis include the development of an open-source simulation framework called PoolSim. It enables the analysis of miner behaviour under different mining pool reward distribution schemes, including the profitability evaluation of queue-based manipulation strategies and pool-hopping between such pools. The thesis introduces the uncle traps attack, specific to Ethereum queue-based mining pools, which adversely affects block throughput and presents a fix to the uncle block reward distribution mechanism. Furthermore, this thesis examines the impact of difficulty adjustment algorithms on block throughput. It identifies instability in block solve times due to cyclicality observed in Bitcoin Cash and analyses how miners' behaviour contributes to this phenomenon. A novel difficulty algorithm based on a negative exponential filter is derived, eliminating oscillations and ensuring more stable block solve times. Lastly, the thesis addresses transaction throughput improvement by presenting a gas price prediction model for Ethereum. It combines deep-learning-based price forecasting with an urgency-based algorithm, optimising the trade-off between timely inclusion and transaction cost. Empirical analysis and real-world evaluation demonstrate significant cost savings with minimal delays compared to existing mechanisms.Open Acces

Essays on the New Blockchain-Based Digital Financial Market : Risks and Opportunities

This doctoral thesis consists of five original essays on the risks and opportunities of the new blockchain-based digital financial market. The purpose of this dissertation is to analyze, identify, and, if possible, predict some of the major risks in the market for blockchain-based digital assets. It analyzes how crypto-specific characteristics are associated with solvency risk, sustainability risk, seclusion risk, and sentiment risk. On top of that, it also sheds light on the opportunity side of this financial innovation. The first essay of this dissertation specifically focuses on cryptocurrency for solvency risks. To forecast potential cryptocurrency default at an early stage, this study focuses on variables that are part of the information set of the investor 1 month at most after the start of trading for a cryptocurrency. The results of this research show that bankruptcies among cryptocurrencies are predictable. The second essay explores energy risk as a fundamental market-driving force for the pricing of cryptocurrency. Cryptocurrencies using a high-energy-consumption consensus protocol are riskier than others because their mining costs are more exposed to changes in energy price. Surprisingly, the study finds that energy consumption does not seem to play a role in pricing cryptocurrency. The third essay hypothesizes that privacy coins form a distinct submarket in the cryptocurrency market, shedding light on seclusion risk. It shows that privacy coins and non-privacy coins are two distinct asset markets within the cryptocurrency market. The fourth essay is about news media sentiment risk. It explores whether news media sentiments have an impact on Bitcoin volatility. It also differentiates financial sentiment and psychological sentiment and finds that financially optimistic investors are driving the Bitcoin market. On the other hand, the fifth essay in this dissertation analyzes opportunities, especially the funding opportunity in the widely known category of new digital assets defined as crypto tokens. It analyzes the determinants of the success of initial coin offerings and finds that initial-coin-offering investors are largely guided by their emotions when making investment decisions. Surprisingly, regulatory framework has not yet become a priority among policymakers. Therefore, this doctoral dissertation not only facilitates future research, but also helps regulators in shaping the future of blockchain-based financial technologies.Tämä väitöskirja koostuu viidestä esseestä, jotka käsittelevät uuden lohkoketjupohjaisen digitaalisen rahoitusmarkkinan riskejä ja mahdollisuuksia. Väitöskirjan tarkoituksena on analysoida, tunnistaa ja mahdollisuuksien mukaan ennustaa joitakin lohkoketjupohjaisten digitaalisten varojen markkinoiden suurimpia riskejä. Siinä analysoidaan, miten kryptovaluuttakohtaiset ominaisuudet liittyvät vakavaraisuusriskiin, kestävyysriskiin, eristäytymisriskiin ja sentimenttiriskiin. Tämän lisäksi se valottaa myös tämän rahoitusinnovaation mahdollisuuksia. Tämän väitöskirjan ensimmäisessä esseessä keskitytään erityisesti kryptovaluuttaan maksukyvyttömyysriskinä. Tässä tutkimuksessa keskitytään muuttujiin, jotka ovat sijoittajan saatavilla korkeintaan 1 kuukausi sen jälkeen, kun kaupankäynti kryptovaluutalla on alkanut. Tämän tutkimuksen tulokset osoittavat, että kryptovaluuttojen konkurssit ovat ennustettavissa. Toisessa esseessä tutkitaan energiariskiä markkinoita ohjaavana voimana kryptovaluutan hinnoittelussa. Kryptovaluutat, jotka käyttävät paljon energiaa kuluttavaa konsensusprotokollaa, ovat muita riskialttiimpia, koska niiden louhintakustannukset ovat alttiimpia energian hinnan muutoksille. Yllättäen tutkimuksessa todetaan, että energiankulutuksella ei näytä olevan merkitystä kryptovaluuttojen hinnoittelussa. Kolmannessa esseessä hypoteesina on, että yksityisyyskolikot muodostavat erillisen alamarkkinan kryptovaluuttamarkkinoilla, ja tutkimus tarkastelee näiden eristäytymisriskiä. Siinä osoitetaan, että yksityisyyskolikot ja ei-yksityisyyskolikot ovat kaksi erillistä omaisuuserämarkkinaa kryptovaluuttamarkkinoilla. Neljäs essee käsittelee uutismedian sentimenttiriskiä. Siinä tutkitaan, vaikuttaako uutismedian sentimentti Bitcoinin volatiliteettiin. Siinä myös erotetaan toisistaan taloudellinen sentimentti ja psykologinen sentimentti ja todetaan, että taloudellisesti optimistiset sijoittajat ohjaavat Bitcoin-markkinoita. Väitöskirjan viidennessä esseessä analysoidaan mahdollisuuksia, erityisesti rahoitusmahdollisuuksi, liittyen laajalti tunnettuihin digitaalisiin tokeneihin. Siinä havaitaan, että näihin omaisuuseriin sijoittavat sijoittajat toimivat pitkälti tunteidensa ohjaamina sijoituspäätöksiä tehdessään. Yllättävää kyllä, sääntelykehyksestä ei ole vielä tullut poliittisten päättäjien prioriteettia. Siksi tämä väitöskirja ei ainoastaan tue tulevaa tutkimusta, vaan auttaa myös viranomaisia lohkoketjupohjaisten rahoitusteknologioiden tulevaisuuden määrittelyssä.fi=vertaisarvioitu|en=peerReviewed

A layered approach to improving Blockchain systems security

During the past several years, blockchain systems have gained a lot of traction and adoption, with during peak periods, the total capitalisation of these systems exceeding 2 trillion. Given the permissionless nature of blockchain systems and their large scope in terms of software - e.g. distributed consensus, untrusted program execution - numerous attack vectors need to be studied, understood and protected against for blockchain systems to be able to deliver their promises of a safer financial system. In this thesis, we study and contribute to improving the security of various parts of the blockchain stack, from the execution to the application layer. We start with one of the lowest layers of the Ethereum blockchain stack, the EVM, and study the resource metering mechanism that is used to limit the total amount of resources that can be consumed by a smart contract. We discover inconsistencies in the metering mechanism and show and responsibly disclose that it would have been possible to execute transactions that would result in a denial of service attack on the Ethereum blockchain. Our findings were part of the motivation of Ethereum for changing some of its gas metering mechanisms. We then broaden our analysis to other blockchain systems and study how different fee mechanisms affect the transactional throughput as well as the usage of the blockchain. We discover that low fees, which are in theory attractive to users, can lead to a lot of spam. We find that for two of the blockchain we analyse, EOS and Ripple, this type of spam leads to system outages where the blockchain is unable to process transactions. Finally, we find that a common motivation for spam transactions is to artificially inflate the activity of the application layer, through wash-trading for example. In the last main chapter of this thesis, we move to the application layer and turn our focus on decentralised finance (DeFi) ecosystem, which is one of the most prevalent types of application implemented on top of blockchain systems. We start by giving formal definitions of the different types of security, namely technical and economic security. With that definition in mind, in the first part of this chapter, we study technical security exploits and develop an automated tool to detect on-chain exploits. We find that the majority of the exploits found through techniques such as program analysis are not exploited in practice, either because of the lack of feasibility of the exploit or because of the lack of economic incentive to do so. In the second part of this chapter, we focus on economic security and study the liquidation mechanism that is used to protect the users of DeFi lending protocols. We highlight how the efficiency of the liquidations has increased over time, and how depegging events of stablecoin have caused very large amounts of liquidations because of the over-confidence in their stability.Open Acces

Digital asset management via distributed ledgers

Distributed ledgers rose to prominence with the advent of Bitcoin, the first provably secure protocol to solve consensus in an open-participation setting. Following, active research and engineering efforts have proposed a multitude of applications and alternative designs, the most prominent being Proof-of-Stake (PoS). This thesis expands the scope of secure and efficient asset management over a distributed ledger around three axes: i) cryptography; ii) distributed systems; iii) game theory and economics. First, we analyze the security of various wallets. We start with a formal model of hardware wallets, followed by an analytical framework of PoS wallets, each outlining the unique properties of Proof-of-Work (PoW) and PoS respectively. The latter also provides a rigorous design to form collaborative participating entities, called stake pools. We then propose Conclave, a stake pool design which enables a group of parties to participate in a PoS system in a collaborative manner, without a central operator. Second, we focus on efficiency. Decentralized systems are aimed at thousands of users across the globe, so a rigorous design for minimizing memory and storage consumption is a prerequisite for scalability. To that end, we frame ledger maintenance as an optimization problem and design a multi-tier framework for designing wallets which ensure that updates increase the ledger’s global state only to a minimal extent, while preserving the security guarantees outlined in the security analysis. Third, we explore incentive-compatibility and analyze blockchain systems from a micro and a macroeconomic perspective. We enrich our cryptographic and systems' results by analyzing the incentives of collective pools and designing a state efficient Bitcoin fee function. We then analyze the Nash dynamics of distributed ledgers, introducing a formal model that evaluates whether rational, utility-maximizing participants are disincentivized from exhibiting undesirable infractions, and highlighting the differences between PoW and PoS-based ledgers, both in a standalone setting and under external parameters, like market price fluctuations. We conclude by introducing a macroeconomic principle, cryptocurrency egalitarianism, and then describing two mechanisms for enabling taxation in blockchain-based currency systems