Cryptocurrency Architecture and Interaction With Market Shocks

Abstract

Blockchain technology appears to be ready to revolutionise a broad number of industries. However, the blockchain itself contains a number of inefficiencies and areas for improvement, namely: transaction fees and transaction speeds. Directed acyclic graphs (DAGs) address, and improve on these inefficiencies and a number of digital currencies utilising this technology have already begun to appear. This paper provides an explanation of the technology behind DAG-based assets, while identifying and highlighting strategic advantages that DAGs possess over traditional blockchains. We conduct a GARCH volatility analysis of a range of blockchain-based and DAG-based cryptocurrencies in the aftermath of a range of market shocks. We find that DAG-based assets become increasingly responsive to market shocks as they mature. Such behavior mirrors that of established cryptocurrencies such as Bitcoin, Ethereum and Litecoin, providing evidence that DAG-based cryptocurrencies now share similar characteristics to traditional blockchain-chain based products.

Keywords: Digital Currencies; Cryptocurrency; Blockchain; Directed Acyclic Graphs; GARCH

JEL Classification: G12