Andreas Park PRO
Professor of Finance at UofT
Instructors: Andreas Park
What is a blockchain?
What is a cryptocurrency?
A glimpse of overall infrastructure
Sue wants to sell ABX
Bob wants to buy ABX
sell order
buy order
Clearing House
Stock Exchange
Broker
Broker
3rd party tech
custodian
custodian
record beneficial ownership
central bank for payment
Retail
Institutional
Pro-Traders
high volume securities
low volume securities
50%
50-60%
0%
30-40%
40-50%
10-20%
Exchange
Internalizer
Wholeseller
Darkpool
Investor
Venue
Broker
Settlement
Exchanges
Wholesellers
Dark pools
Broker Internalizations
Exchanges
Wholesellers
Dark pools
Broker Internalizations
(
(
Retail
Institutional
Pro-Traders
Rule: must send to exchange with best price
Exchange
Wholeseller
market order
limit order
In Europe: no best price obligation
Exchange
Dark pools
Type 2: "borrow" broker-dealer system
Type 1: licenced broker-dealer
risk control
You commonly don't access the market directly.
Brokers take many decisions but they are bound by regulations.
Critical: markets are formally linked by best-price rules.
Retail
Institutional
Pro-Traders
high volume securities
low volume securities
50%
50-60%
0%
30-40%
40-50%
10-20%
Investor
Venue
Settlement
On chain
Exchange
Internalizer
Wholeseller
Darkpool
Investor
Venue
Broker
Settlement
Investor
Venue
Settlement
On chain
Retail, Institutions, and Pro-Traders are indistiguishable
not clear whether and which institutions are active
Exchanges
Dark pools
Smart On-chain contracts
Exchanges
Smart Contract
Order Driven
Market Maker
Exchanges
Smart On-chain contracts
(307 CEX, rest DEX)
Settle on the blockchain for digital "assets"
Wire transfer for fiat
BTC/USD
ask: 7,600
bid: 7,550
BTC/USD
ask: 7,500
bid: 7,450
buy low
sell high
BTC/USD
ask: 7,600
bid: 7,550
BTC/USD
ask: 7,500
bid: 7,450
buy BTC
sell BTC
move BTC to Kraken
Wire: free*; 1-5 days
Credit card: 3.5%
trading fee: 10-25 bps
flat fee in BTC \(\approx\) $4-8
\(\approx\) 10-60 minutes
trading fee: 0-26 bps
35 USD + 0.125%
($5 if >$50,000)
1-3 business days;
possible other fees/delays
Some exchanges allow short selling
Crypto Wash Trading, Lin William Cong, Xi Li, Ke Tang, Yang Yang
Volume on centralized exchanges
Price Manipulation on centralized exchanges
Cryptocurrency Pump-and-Dump Schemes by Li, Shin, Wang 2020
Is Bitcoin really un-tethered by Griffin and Shams JF 2020
August 2016
Crypto Wash Trading, Lin William Cong, Xi Li, Ke Tang, Yang Yang
What is pump and dump?
arranged via Telegram Channels
IS BITCOIN REALLY UN-TETHERED? JOHN M. GRIFFIN and AMIN SHAMS
Journal of Finance 2020
Regulated Exchanges
Derivatives trade mostly offshore! Unregulated(?!)
Historically: “Tether Platform currencies are 100% backed by actual fiat currency
assets in our reserve account.”
Today: "The Tether Platform is fully reserved when the sum of all tethers in circulation is less than or equal to the value of our reserves."
IS BITCOIN REALLY UN-TETHERED?
JOHN M. GRIFFIN and AMIN SHAMS
Journal of Finance 2020
Text
IS BITCOIN REALLY UN-TETHERED?
JOHN M. GRIFFIN and AMIN SHAMS
Journal of Finance 2020
Text
IS BITCOIN REALLY UN-TETHERED?
JOHN M. GRIFFIN and AMIN SHAMS
Journal of Finance 2020
Figure 1. Aggregate Flow of Tether between Major Addresses
Figure 3. Aggregate Flow of Bitcoin between Major Addresses.
Top Accounts Associated with the Flow of Tether from and Bitcoin to Bitfinex
the 1% of hours with the strongest lagged Tether flow are associated with 58.8% of the Bitcoin buy-and-hold return over the period.
the "normal-times" returns
August 2016
By yours truly, Dec 2017: "What really concerns me about the current craziness is the role of the cryptocurrency exchange platforms, such as Coinbase, Quadriga, or Bitfinex, which most people use to buy Bitcoins. These are like banks that hold deposits. For cryptocurrencies to succeed it is critical that these interfaces with the real world are financially robust. Are they? Do they have all the Bitcoins they sell? Can they always satisfy depositors’ demands?"
https://www.forbes.com/sites/jasonbrett/2019/12/19/congress-considers-federal-crypto-regulators-in-new-cryptocurrency-act-of-2020/#7ddcdfd65fcd
https://www.osc.ca/en/news-events/news/osc-working-ensure-crypto-asset-trading-platforms-comply-securities-law
SEC denies Bitcoin ETF
Actually ...
How do you set the price?
Price mechanism:
Prices
invariant \(k=4\times4=16\)
Instantaneous exchange rate:
1 = 1
Contract deposit:
sell 4 DAI for USDC
what price will therefore be quoted?
how many USDC?
Problem: large "slippage" (or price impact)
establish and sell a new token
front-running
transactions enter mem-pool
\(\to\) all visible there
arbitrageur make instant-swap trade at higher gas price
\(\to\) trade instead of original trade
\(\to\) reverse to gain slippage from earlier trader
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3
5
6
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2
5
3
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7
4
front-running is annoying for the front-run - but will it happen?
\(\Rightarrow\) profitable!
take three pairs (ignore that BTC is not directly on Ethereum)
BTC-DAI
ETH-BTC
ETH-DAI
\(\to\) simply connect with MetaMask (or similar wallet)
\(X\)
\(Y\)
normal trade: sell \(x\) \(\to\) get \(y'\)
\(Y-y'\)
\(X+x\)
front-running:
\(Y-y'-y''\)
\(X+2x\)
\(y'>y''~\Rightarrow\)
front-running is intrinsically profitable
Disclaimer:
From Vitalik Buterin's post on the topic:
https://ethresear.ch/t/improving-front-running-resistance-of-x-y-k-market-makers/1281
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By Andreas Park