Andreas Park
Data: coinschedule
for comparison: total size of
Toronto Stock Exchange: $2,200B
Toronto Venture Exchange: $41B
from Forbes
Azure Blockchain Tokens [...] lets enterprises, or anyone really, design, issue and manage a wide range of assets,
Currently, the platform is a permissioned version of the ethereum blockchain that uses Microsoft’s Azure cloud computing.
In the future Azure Blockchain Tokens will interact with the public Ethereum blockchain or even at distributed ledgers created by some of Microsoft’s own competitors.
Source: Tokendata
Source: Satis Group LLC
Source: Morgan Stanley (Nov 2018) “Update: Bitcoin, Cryptocurrencies and Blockchain”
Source: Tokendata
"Eclipse of the Public Corporation or Eclipse of the Public Markets?" by Craig Doidge, Kathleen M. Kahle, G. Andrew Karolyi, and René M. Stulz
Exchange
Internalizer
Wholeseller
Darkpool
Investor
Venue
Broker
Settlement
Investor
Venue
Settlement
On chain
August 2016
most tokens stay at exchanges and don't get settled on the blockchain
some usage tokens are "in use"
Source: Interactive Brokers
Do people understand utility tokens?
native to a blockchain for payment
examples: Bitcoin, Bitcoin Cash, Ether, Lumens, Cardano
coinbase reward to miners
creation and redemption process as part of blockchain operation
examples: Bitcoin, Bitcoin Cash, Ether, Lumens, Cardano
native to a blockchain and essential for operation
\[\text{Fundamental Value}= \sum_{t=1}^\infty \frac{E(\text{cash flow}_t)}{(1+r)^t}.\]
\[\max_{q^c,q^f,s}u(c_t)+\beta Eu(u_{t+1})\]
\[p^c=\beta E\left[\frac{u'(c^o)}{u'(c^y)}\times\frac{1+\theta}{1+F'(X_t)}\times p^c_{t+1}\right].\]
\[\beta=\frac{1}{1+r}\frac{u'(c^o)}{Eu'(c^y)}.\]
\[p^c=\frac{1}{1+r}E\left(\frac{u'(c^o)}{Eu'(c^y)}p^c_{t+1}(1+T)\right).\]
There could be multiple equilibria.
Price \(p=0\) at all dates is an equilibrium.
Further insights:
price of the cryptocurrency at time \(t=\) present value of
the expectation of the product of two terms
pricing kernel (captures correlation between marginal utility of consumption and the crypto price).
sum of the crypto price at time \(t+1\) and its
convenience yield.
convenience yield \(=\) scalar \(\times\) crypto price
Ceteris paribus \(p^c \nearrow \Rightarrow\) convenience yield \(\nearrow\).
Not so for stocks in perfect market
stock price at \(t\) reflects the \(E[p_{t+1}+d_{t+1}]\)
dividends at \(t+1\) do not depend on the \(t+1\) stock price.
\(\Rightarrow\) for stocks, dividends cause fundamental value and therefore prices
For the cryptocurrency, prices cause convenience yields
and therefore fundamental value.
Multiplicity: if a price sequence forms equilibrium, then sequence \(\times\) noise term with expectation \(=1\) is also an equilibrium.
=>large volatility for cryptocurrency prices!
(Even when fundamentals are not very volatile.)
large transaction costs for crypto => large expected returns on crypto
large benefits from crypto => small expected returns on crypto
Interpretation:
bitcoin prices reflect future stream of transactional benefits
In future, when the transactional services
of bitcoin will have become large, bitcoin prices will have further increased, but equilibrium expected returns will be low.
Network | Multiple verifiers | Free entry for verifiers | Asset | Unity |
---|---|---|---|---|
DTCC | n | n | public equity | n |
Bitcoin | y | y | bitcoin | y |
Ethereum | y | y | ether | y |
Ethereum | y | y | ERC-20 tokens | n |
Ripple | y | n | XRP | n |
objective function user: \(\max \left(\text{transactional service}+\text{resale value}\right) \times \text{network security} -\text{cost}\)
equilibrium price is a function of
unstable equilibrium
stable
equilibrium
unstable
=smallest network with positive price equilibrium; any smaller network has price=0
Cryptocurrencies are volatile
Stablecoins try to solve this
other solution
funding figures from Nov 2018; source: blockchain.com
\(x_i\)
\(x_j\)
\(x_k\)
\(c\)
\(MR=x-2q\)
\(p(q)=x-q\)
\(q^m=(x-c)/2\)
\(c\)
\(MR=x-2q\)
\(p(q)=x-q\)
\(q^m=q^e\)
general idea: sell future output
two approaches for token sales
\(c\)
\(MR\)
\(p(q)=x-q\)
\(q^{rs}<q^m\)
\(\alpha_t MR\)
\(c\)
\(MR\)
\(p(q)=x-q\)
\(q^{ps}>q^m\)
\(MR+t\)
\(c\)
\(MR\)
\(p(q)=x-q\)
\(q^t=q^m\)
\(\alpha_tMR+t\)
Presell \(t\) tokens.
If quantity produced \(q>t\), then share \(\alpha_t\) of revenue from incremental \(q-t\) tokens with tokenholders
As with equity, the entrepreneur receives the full NPV.
The entrepreneuer produces optimally at \(q^t=q^m\)
If \(q<t\) \(\Rightarrow\) redeem at rate \(t/q\) and tokenholders receive refund of \(c(t-q)\).
Idea:
entrepreneur can influence expected demand
with effort
without effort
assume \[\textit{NPV}(\theta_h)>0>\textit{NPV}(\theta_l)\]
equity holders
possibly break even
with effort
without effort
cannot break even
entrepreneur
earns \((1-\alpha_e)\ \frac{(\theta_h-c)^3}{12\theta_h} -C_e \)
with effort
without effort
earns \((1-\alpha_e) \frac{(\theta_l-c)^3}{12\theta_l}\)
\(>\) ?
exert effort iff
\[\textit{NPV}_h-C_e\ge \textit{NPV}_h\times\frac{\theta_h}{\theta_l}\left(\frac{\theta_l-c}{\theta_h-c}\right)^3\]
token holders
possibly break even
with effort
without effort
cannot break even
entrepreneur
earns \(\frac{c}{c+t} \frac{2}{3\theta_h}\left(\frac{\theta_h-c}{2}-t \right)^3 -C_e \)
with effort
without effort
earns \(\frac{c}{c+t} \frac{2}{3\theta_l}\left(\frac{\theta_l-c}{2}-t \right)^3\)
\(>\) ?
exert effort iff
\[\textit{NPV}_h-C_e\ge \textit{NPV}_h\times\frac{\theta_h}{\theta_l}\left(\frac{\theta_l-c-2t}{\theta_h-c-2t}\right)^3\]
key math insight
\[\textit{NPV}_h\times\frac{\theta_h}{\theta_l}\left(\frac{\theta_l-c}{\theta_h-c}\right)^3 >\textit{NPV}_h\times\frac{\theta_h}{\theta_l}\left(\frac{\theta_l-c-2t}{\theta_h-c-2t}\right)^3\]
only the first 1:16 min are relevant
Jerry becomes trusted third party and enables the spot exchanges
Jerry injects himself as an escrow
this is centralized trust
neither party trusts that the exchange happens
allow new applications, new interactions, new business models
applications require (tech + economics) + business + legal background
understanding of economics on blockchain requires development
there is real economic value in tokens, when used properly
recording ownership on a blockchain is a no-brainer
blockchain tokens can be a lot more!
@financeUTM
andreas.park@rotman.utoronto.ca
slides.com/ap248
sites.google.com/site/parkandreas/
youtube.com/user/andreaspark2812/