A Model of Cryptocurrencies

59 Pages Posted: 9 Mar 2020 Last revised: 10 Oct 2021

See all articles by Michael Sockin

Michael Sockin

University of Texas at Austin - Red McCombs School of Business

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 2020

Abstract

We model a cryptocurrency as membership in a decentralized digital platform developed to facilitate transactions between users of certain goods or services. The rigidity induced by the cryptocurrency price having to clear membership demand with supply of token by speculators, especially with strong complementarity in membership demand, can lead to market breakdown. While user optimism mitigates the market fragility by increasing user participation, speculator sentiment exacerbates it by crowding users out. Informational frictions attenuate the risk of breakdown by dampening price volatility and platform performance. Furthermore, the users' anticipation of losses from strategic attacks by miners exacerbates the market fragility.

Suggested Citation

Sockin, Michael and Xiong, Wei, A Model of Cryptocurrencies (March 2020). NBER Working Paper No. w26816, Available at SSRN: https://ssrn.com/abstract=3550965

Michael Sockin (Contact Author)

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Wei Xiong

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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