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Economics of Ethereum

Paper Session

Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)

Marriott Rivercenter, Conference Room 8
Hosted By: Association of Financial Economists
  • Chair: Andreas Park, University of Toronto

A Macro Finance Model for Proof-of-Stake Ethereum

Urban J. Jermann
,
University of Pennsylvania

Abstract

With the switch to proof-of-stake, Ethereum has implemented fundamental changes to its monetary and fee policies. This paper studies the money supply, fees, and prices under this new regime within a dynamic macro finance model. The model's long run properties are characterized analytically. The fraction of staked ETH is shown to depend on a single parameter representing the utility value of using ETH relative to the value of computational effort on the network. The market capitalization in terms of the dollar numeraire is shown to be invariant to the staking reward factor. For a preliminary quantitative analysis, the model is calibrated with the short sample of available price and fee data. The share of ETH staked in the long-run is estimated to be 26%. The implied long-run money supply can plausibly be below the current level. The potential welfare gains from alternative and more activist staking yield policies are likely to be unpredictable and small.

Time is Money: Strategic Timing Games in Proof-of-Stake Protocols

Caspar Schwarz-Schilling
,
Ethereum Foundation
Fahad Saleh
,
Wake Forest University
Thomas Thiery
,
Ethereum Foundation
Jennifer Pan
,
Jump Crypto
Nihar Shah
,
Jump Crypto
Barnabé Monnot
,
Ethereum Foundation

Abstract

We propose a model suggesting that honest-but-rational consensus participants may play timing games, and strategically delay their block proposal to optimize MEV capture, while still ensuring the proposal's timely inclusion in the canonical chain. In this context, ensuring economic fairness among consensus participants is critical to preserving decentralization. We contend that a model grounded in honest-but-rational consensus participation provides a more accurate portrayal of behavior in economically incentivized systems such as blockchain protocols. We empirically investigate timing games on the Ethereum network and demonstrate that while timing games are worth playing, they are not currently being exploited by consensus participants. By quantifying the marginal value of time, we uncover strong evidence pointing towards their future potential, despite the limited exploitation of MEV capture observed at present.

Inclusion and Democratization Through Web3 and DeFi? Initial Evidence from the Ethereum Ecosystem

Lin William Cong
,
Cornell University
Ke Tang
,
Tsinghua University
Yanxin Wang
,
Xi'an Jiaotong University
Xi Zhao
,
Xi'an Jiaotong University

Abstract

Web3 and DeFi are widely advocated as innovations for greater financial inclusion and democratization. We assemble the most comprehensive dataset to date on the largest Web3 ecosystem and use large-scale computing to investigate the claim. We discuss Ethereum's network structure, time trends, and distributions of transactions, mining, and ownership. Mining income and Ether ownership are concentrated in a few nodes, even after excluding exchange and mining pool wallets, with inequalities more exacerbated than observed in the real economy. Network activities are dominated by large transactions, shifting from peer-to-peer to user-DApps/DeFi interactions, and from Ether-based to ERC-20-token-based. High percentage transaction fees, congestion-induced gas-price fluctuation, suboptimal reserve setting, and large return volatility of tokens disproportionately harm small, unsophisticated, and new nodes, with high failure rates hurting all users. Finally, we present causal evidence that base-fee burning mechanisms (e.g., EIP-1559) and airdrop programs (e.g., OmiseGo Airdrop) promote inclusion and equality through monetary redistribution.

Discussant(s)
Thomas Rivera
,
McGill University
Shihao Yu
,
Columbia University
Nicola Borri
,
Luiss University
JEL Classifications
  • G2 - Financial Institutions and Services
  • O3 - Innovation; Research and Development; Technological Change; Intellectual Property Rights