6 research outputs found
Stablecoins 2.0: Economic Foundations and Risk-based Models
Stablecoins are one of the most widely capitalized type of cryptocurrency.
However, their risks vary significantly according to their design and are often
poorly understood. We seek to provide a sound foundation for stablecoin theory,
with a risk-based functional characterization of the economic structure of
stablecoins. First, we match existing economic models to the disparate set of
custodial systems. Next, we characterize the unique risks that emerge in
non-custodial stablecoins and develop a model framework that unifies existing
models from economics and computer science. We further discuss how this
modeling framework is applicable to a wide array of cryptoeconomic systems,
including cross-chain protocols, collateralized lending, and decentralized
exchanges. These unique risks yield unanswered research questions that will
form the crux of research in decentralized finance going forward
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On the Instability of Bitcoin Without the Block Reward
Bitcoin provides two incentives for miners: block rewards and transaction fees. The former accounts for the vast majority of miner revenues at the beginning of the system, but it is expected to transition to the latter as the block rewards dwindle. There has been an implicit belief that whether miners are paid by block rewards or transaction fees does not affect the security of the block chain.
We show that this is not the case. Our key insight is that with only transaction fees, the variance of the block reward is very high due to the exponentially distributed block arrival time, and it becomes attractive to fork a "wealthy" block to "steal" the rewards therein. We show that this results in an equilibrium with undesirable properties for Bitcoin's security and performance, and even non-equilibria in some circumstances. We also revisit selfish mining and show that it can be made profitable for a miner with an arbitrarily low hash power share, and who is arbitrarily poorly connected within the network. Our results are derived from theoretical analysis and confirmed by a new Bitcoin mining simulator that may be of independent interest.
We discuss the troubling implications of our results for Bitcoin's future security and draw lessons for the design of new cryptocurrencies