Staking, Token Pricing, and Crypto Carry

74 Pages Posted: 6 Apr 2022 Last revised: 29 Jun 2022

See all articles by Lin William Cong

Lin William Cong

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Zhiheng He

Tsinghua University - Institute of Economics

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University

Date Written: March 16, 2022

Abstract

The phenomenal rise of cryptocurrencies and decentralized finance have prominently featured ``staking'': Besides offering a convenience yield for transactions as digital media of exchange, tokens are frequently staked (and slashed) for base-layer consensus generation or for incentivizing economic activities and platform development, and consequently earn stakers rewards in the same tokens. To provide insights into the economics of staking and its asset pricing implications, we build a continuous-time model of a token-based economy where agents heterogeneous in wealth dynamically solve their wealth allocation (stake-transact-consume) problems. We cast the interactions as a mean field game with stochastic control and systematic shocks, which underscores aggregate staking ratio as a key variable linking staking to token pricing and equilibrium reward rate. Empirical findings on all major stakable tokens corroborate the model predictions. In particular, staking ratio has a positive correlation with reward rates in the cross section and has a negative correlation in the time series. Higher reward rates attract greater future staking, increasing an individuals' staking allocation and the staking ratio in aggregate, which in turn predicts positive excess returns. Finally, we use transaction convenience to rationalize violations of the uncovered interest rate parity and significant carry premia (e.g., a long-short carry yields a Sharpe ratio of 1.6) in the cryptocurrency data.

Keywords: Blockchain, DeFi, Proof-of-Stake, Yield Farming, Tokenomics.

Suggested Citation

Cong, Lin and He, Zhiheng and Tang, Ke, Staking, Token Pricing, and Crypto Carry (March 16, 2022). Available at SSRN: https://ssrn.com/abstract=4059460 or http://dx.doi.org/10.2139/ssrn.4059460

Lin Cong

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Zhiheng He (Contact Author)

Tsinghua University - Institute of Economics ( email )

MingZhai Building
Beijing, 100084
China

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University ( email )

No.1 Tsinghua Garden
Beijing, 100084
China

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