Title:
The Dark Side of Crypto and the Tokenomics of Staking (link to video)
Abstract:
I provide a brief survey of the dark side of crypto, including market manipulation, crypto-enabled cybercrimes, failures due to vertical integration and the lack of regulation, financial exclusion and inequality in DeFi, etc. All these call for large-scale statistical analysis, blockchain forensics, and a better understanding of the economics of blockchains and DeFi. To this end, I delve into how the phenomenal rise of cryptocurrencies and DeFi have prominently featured “staking”. Besides offering a convenience yield for transactions as digital media of exchange, tokens are frequently staked (and slashed) for base-layer consensus generation or for incentivizing economic activities and platform development, and consequently earn stakers rewards in the same tokens. Specifically, we build a continuous-time model of a token-based economy where agents heterogeneous in wealth dynamically solve their wealth allocation (stake-transact-consume) problems. We cast the interactions as a mean field game with stochastic control and systematic shocks, which underscores aggregate staking ratio as a key variable linking staking to token pricing and equilibrium reward rate. Empirical findings on all major stakable tokens corroborate the model predictions. In particular, staking ratio has a positive correlation with reward rates in the cross section and has a negative correlation in the time series. Higher reward rates attract greater future staking, increasing an individuals' staking allocation and the staking ratio in aggregate, which in turn predicts positive excess returns. Finally, we use transaction convenience to rationalize violations of the uncovered interest rate parity and significant carry premia (e.g., a long-short carry yields a Sharpe ratio of 1.6) in the cryptocurrency data.
The papers I focus on are:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4059460 - Staking, Token Pricing, and Crypto Carry
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4188661 - An Anatomy of Crypto-Enabled Cybercrimes
Several other related papers are:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4358561 - Blockchain Forensics and Crypto-Related Cybercrimes
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4162966 - Inclusion and Democratization Through Web3 and DeFi? Initial Evidence from the Ethereum Ecosystem
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3530220 - Crypto Wash Trading
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3143724 - Decentralized Mining in Centralized Pools
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4033617 - Tax-Loss Harvesting with Cryptocurrencies
Bio:
Will Cong is the Rudd Family Professor of Management, a tenured Professor of Finance, and the founding director of FinTech at Cornell Initiative and the Digital Economy and Financial Technology (DEFT) Lab. He is also a Finance editor at the Management Science, Research Associate at the NBER, cofounder of two international research forums (ABFR and CBER), and was formerly a Kauffman Junior Fellow, Poets & Quants World Best Business School Professor, George P. Shultz Scholar, and Lieberman Fellow. He previously taught at the University of Chicago after earning his Finance Ph.D. and MS in Statistics from Stanford, and A.M. in Physics jointly with A.B. in Math and Physics from Harvard. He studies applied theory, asset pricing, corporate finance, and information economics. He pioneered interdisciplinary research on tokenomics, AI for finance, blockchain forensics and design, and how digitization and big data interact with and influence competition, growth, and entrepreneurship. His work has been recognized with numerous best paper prizes and grants and has been widely circulated and adopted in the industry. He is highly sought-after not only as keynote speaker at various international conferences and forums, but also as advisors for FinTech firms and quant funds, as well as government and regulatory agencies around the globe.