Auctions with Tokens

I study mechanism design with blockchain-based tokens, that is, tokens that can be used within a mechanism but can also be saved and traded outside of the mechanism. I do so by considering a repeated, private-value auction, in which the auctioneer accepts payments in a blockchain-based token he creates and initially owns. I show that the present-discounted value of the expected revenues is the same as in a standard auction with dollars, but these revenues accrue earlier and are less variable. I then introduce non-contractible effort and the possibility of misappropriating revenues. I compare the auction with tokens to an auction with dollars in which the auctioneer can also issue financial securities. An auction with tokens is preferred when there are sufficiently severe contracting frictions, while the opposite is true when contracting frictions are low.Comment: Under revie

Financial incentives for the development of blockchain-based platforms

A developer creates a new blockchain-based decentralized digital platform by investing resources and exerting costly effort. Performing exchanges on the platform is possible only by using a new crypto-token. The initial stock of this token is owned by the developer, who can sells some in an Initial Coin Offering (ICO), and more later on a frictionless financial market. I show that, if the developer raises funds via an ICO, then in every subsequent period with strictly positive probability he may liquidate his tokens and stop the development of the platform. Even if the developer does need to hold an ICO, the equilibrium will nonetheless be inefficient because the developer's payoff depends on the volume of transaction on the decentralized digital platform in each period. Instead, the social value of the platform depends on the present discounted value of the total surplus created. The developer's effort and investment could be above or below their optimal levels, depending on the discount factor and the elasticity of supply/demand of the users of the platform

Commitment Against Front Running Attacks

We provide a game-theoretic analysis of the problem of front-running attacks. We use it to distinguish attacks from legitimate competition among honest users for having their transactions included earlier in the block. We also use it to introduce an intuitive notion of the severity of front-running attacks. We then study a simple commit-reveal protocol and discuss its properties. This protocol has costs because it requires two messages and imposes a delay. However, we show that it prevents the most severe front-running attacks while preserving legitimate competition between users, guaranteeing that the earliest transaction in a block belongs to the honest user who values it the most. Furthermore, it reduces competition among attackers, which also benefits honest users