Economics of Proof-of-Stake Payment Systems

37 Pages Posted: 10 Jan 2023

See all articles by Leonid Kogan

Leonid Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Giulia Fanti

University of Illinois at Urbana-Champaign - Department of Electrical and Computer Engineering

Pramod Viswanath

University of Illinois at Urbana-Champaign

Date Written: May 1, 2021

Abstract

In this paper we develop a valuation framework for a Proof-of-Stake (PoS) payment system. Active network participants (proposers and validators) are required to stake tokens, and receive payments in return for their services. This property of the PoS system connects cash flows to token holdings, and allows for valuation using conventional methods. As an application of our framework, we analyze security properties of the PoS system. We show that while high token valuation relative to the flow of transactions is central to network security, valuation bubbles have adverse security implications. State-contingent monetary policies can be used to alleviate this problem.

Suggested Citation

Kogan, Leonid and Fanti, Giulia and Viswanath, Pramod, Economics of Proof-of-Stake Payment Systems (May 1, 2021). MIT Sloan Research Paper No. 5845-19, 2021, Available at SSRN: https://ssrn.com/abstract=4320274 or http://dx.doi.org/10.2139/ssrn.4320274

Leonid Kogan (Contact Author)

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

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Giulia Fanti

University of Illinois at Urbana-Champaign - Department of Electrical and Computer Engineering

Pramod Viswanath

University of Illinois at Urbana-Champaign

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