How does a blockchain work?

?

Decentralized Trading

Trading Infrastructure

Application: decentralized trading with automated market makers

Source of savings: 

• better risk sharing among liquidity providers
• better use of capital

Possible transaction cost savings when applied to equity trading: \(\approx\) 30%

Source: "Learning from DeFi: Would Automated Market Makers Improve Equity Trading?" working paper, Malinova & Park 2023

Decentralized Lending

Application: Pool-based borrowing and lending

Automated Investment Strategies

Obvious Smart Contract Application: Automate Investment  Strategies

Tokenomics

• People clearly treat tokens and cryptocurrencies as objects of speculation

• data: authors calculations from TAQ (up to March 2023)
• crypto volume worldwide is larger by factor >4

What roles do tokens play?

\(\to\) key feature: no necessary intermediaries

1. Self-custody of assets
2. Access to financial infrastructure
3. Conceptually non-custodial services
4. Value management layer = common resource
5. Platform approach to commerce

Without intermediaries:
platform economics!

Asset Tokenization or
"The Creation of Asset-Linked Tokens"

Tokenization is coming

• this list contains mostly "neglected" assets
• report published in 2024
• what about very "busy" assets aka equities
  • what challenges apply to tokenization?
  • what problem are you trying to solve vis-a-vis traditional markets?
  • what do we have to worry about with a defi implementation?
  • what are the opportunities?

digital representation of a unit of a fiat currency on a blockchain

pulled from Nick Carter's talk on "Will stablecoins serve or subvert U.S. interests?"

Central Bank-Issued Digital Currencies

Evolution

2008

Challenges

Challenge 1: Energy Consumption

Ethereum Challenge 1: Environment

• Carbon footprint of Switzerland
• Power consumption of Austria

Ethereum Challenge 2: Throughput

Ethereum Throughput Solution: L2s/Rollups

Ethereum Challenge 3: State Size

Source: Ycharts

Money Laundering and Crime

1. Does it provide scale?
2. Does it enable new criminal activity?
3. Is there substitution from super-visable means? Is it easier and safer to use for criminals than traditional means?

What's special about crypto-crime?

Chainalysis Crime Report

Final Thoughts

Some Final Thoughts on Terminology

• The terms blockchain and decentralized are often tossed around with various different meanings. So some thoughts.
• Decentralized \(\not=\) fragmented
• Blockchain \(=\) aspires to work like a single computer
• \(\to\) Decentralized blockchain \(=\) common resource 
• Decentralized applications on blockchains \(=\) generally accessible without restrictions
• blockchain \(=\) permissionless
• permissioned/authorized blockchain \(=\) a very slow database
• permissioned \(\Rightarrow\) attempt to replicate the existing world
• non-custodial \(=\) user is in charge and bears all risks
• centralized exchange \(=\) custodial exchange
• regulators and lawyers hate non-custodial (who can they call? who is on the hook if things go wrong?)
• regulators cannot regulate the general population and firms not on their radar

Some Final Thoughts

• this presentation only scratches at the surface, there are tens of thousands of people working on blockchain ideas
   
• this is not (only) garage band work -- university research plays a key role
   
• blockchain tech won't get uninvented.
   
• the space is still trying to figure things out, including tech and economic challenges
   
• great progress has been made, but things will and do still go wrong
   
• a common resource can have huge economic benefits
   
• biggest threat of it all: crony capitalism \(=\) firm using policy makers and regulators to define rules that secure their rent-seeking