Markets for Crypto Tokens, and Security under Proof of Stake

48 Pages Posted: 24 Jan 2021

See all articles by Christian Catalini

Christian Catalini

Diem Association and Diem Networks US; Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Ravi Jagadeesan

Stanford University - Department of Economics

Scott Duke Kominers

Harvard University

Date Written: December 1, 2020

Abstract

Cryptocurrency systems based on proof of stake (PoS) grant governance rights to the holders of currency tokens and therefore are vulnerable to attack by adversaries who buy tokens in order to gain control. To evaluate the robustness of PoS cryptocurrencies to such attacks, we model the market for tokens and determine how the cost of attacking the system depends on the level and shape of token supply and demand. We show that, contrary to popular belief, the appreciation of tokens in response to demand by attackers plays a small role in securing the system. In particular, stablecoins can be less vulnerable to attack than cryptocurrencies that are freely floating. Moreover, PoS cryptocurrencies that primarily function as mediums of exchange are vulnerable to attack if the velocity of money is high.

Keywords: blockchain, cryptocurrency, stablecoins, proof of stake, market design

JEL Classification: D02, D47, E41, E42, E51

Suggested Citation

Catalini, Christian and Jagadeesan, Ravi and Kominers, Scott Duke, Markets for Crypto Tokens, and Security under Proof of Stake (December 1, 2020). Available at SSRN: https://ssrn.com/abstract=3740654 or http://dx.doi.org/10.2139/ssrn.3740654

Christian Catalini

Diem Association and Diem Networks US ( email )

Washington, D.C., DC
United States

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-480
Cambridge, MA MA 02142
United States

HOME PAGE: http://https://mitsloan.mit.edu/faculty/directory/christian-catalini

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ravi Jagadeesan

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
STANFORD, CA 94305-6072
United States

Scott Duke Kominers (Contact Author)

Harvard University ( email )

Rock Center
Harvard Business School
Boston, MA 02163
United States

HOME PAGE: http://www.scottkom.com/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
422
Abstract Views
1,575
rank
88,964
PlumX Metrics