Ledger

How Do Decentralized Finance Protocols Compare to Traditional Financial Products? A Taxonomic Approach

Mark Rüetschi, Carlo Campajola, Claudio J. Tessone — Wed, 04 Sep 2024 00:00:00 -0400

This paper creates a new taxonomy of Decentralized Finance (DeFi) protocols following the methodology specifically tailored to information systems set out by Nickerson et al. (2013). This taxonomy provides a tool to classify DeFi protocols, allowing for a structured comparison with traditional financial mechanisms in the present-day (as included in this paper), as well as providing a repeatable procedure in order to track development of the space in the future. Further, the clustering of classified protocols facilitates the rapid identification of similar protocols beyond the mere identification of functions. The dimensions and characteristics of the taxonomy are discussed, as well as qualitative observations concerning the current DeFi landscape. Comparisons with traditional financial mechanisms highlight not only instances of one-to-one replacement of centralized instruments with decentralized alternatives, but also new innovations and products better suited to DeFi environments. Risks and opportunities around these inventions are also discussed.

Granger-Causal Effects of Consumer Behavior on NFT Sales

Stoyan R. Angelov — Tue, 28 May 2024 00:00:00 -0400

An understanding of what influences the NFT market is valuable in such a speculative space, and predictors of directional shifts in NFT sales are beneficial to NFT users and investors alike. For these reasons, research was undertaken to determine if metrics relating to consumer behavior could predict NFT market sales. To begin, a Buyer Activity Metric and a Buyer Valuation Metric were calculated using open-access data regarding the NFT market. A three-variable vector autoregression (VAR) model was then constructed using these metrics and NFT sales data. Changes in monthly NFT sales were found to be Granger-caused by changes in both the Buyer Activity Metric and the Buyer Valuation Metric. Changes in each metric were determined to precede changes in NFT sales by up to four months. The associations were also determined to be unidirectional, indicating a clear cause-and-effect style relationship. Questions about these predictive abilities were then theoretically explored.

Market Neutral Liquidity Provision

Basile Maire, Marcus Wunsch — Mon, 18 Nov 2024 00:00:00 -0500

Automated Market Makers with concentrated liquidity have to date achieved market dominance among competing spot trading AMM models in Decentralized Finance. We shift the prevalent research focus on liquidity providers’ loss metrics, such as Impermanent Loss or Loss-Versus-Rebalancing, to a market neutral strategy. We derive a hedge portfolio which allows for concentrated liquidity provision while maintaining market neutrality. We present an example of the hedge portfolio and highlight the practical restrictions. The hedge portfolio consisting of options and futures requires a significant capital outlay compared to the amount of liquidity provided, but typically earns carry from futures contango.

Reconciling Open Interest with Traded Volume in Perpetual Swaps

Ioannis Giagkiozis, Emilio Said — Wed, 03 Apr 2024 00:00:00 -0400

Perpetual swaps are derivative contracts that allow traders to speculate on, or hedge, the price movements of cryptocurrencies. Unlike futures contracts, perpetual swaps have no settlement or expiration in the traditional sense. The funding rate acts as the mechanism that tethers the perpetual swap to its underlying with the help of arbitrageurs. Open interest, in the context of perpetual swaps and derivative contracts in general, refers to the total number of outstanding contracts at a given point in time. It is a critical metric in derivatives markets as it can provide insight into market activity, sentiment and overall liquidity. It also provides a way to estimate a lower bound on the collateral required for every cryptocurrency market on an exchange. This number, cumulated across all markets on the exchange in combination with proof of reserves, can be used to gauge whether the exchange in question operates with unsustainable levels of leverage, which could have solvency implications. We find that open interest in Bitcoin perpetual swaps is systematically misquoted by some of the largest derivatives exchanges; however, the degree varies, with some exchanges reporting open interest that is wholly implausible to others that seem to be delaying messages of forced trades, i.e., liquidations. We identify these incongruities by analyzing tick-by-tick data for two time periods in 2023 by connecting directly to seven of the most liquid cryptocurrency derivatives exchanges.

Decentralization, Blockchains, and the Development of Smart Communities in Economically Challenging Environments

Brett Bourbon, Renita Murimi — Fri, 07 Jun 2024 00:00:00 -0400

Current implementations of blockchain technologies for smart cities assume environments with ample socio-technical resources. In this paper, we analyze four particular cases to show how blockchains can be used to create smart communities within under-developed and resource-poor environments. In these contexts, blockchains were critical in developing and maintaining trust within the community while meeting specific social needs. Our analysis of these specific cases was then used to derive a definition of a “smart community”. We provide a schematic outline of the foundational elements for the development of smart communities using blockchain technology. The goal of our paper is to show that blockchains hold promise not just for building smart cities in resource-rich contexts, but also for building smart communities in resource-impoverished contexts using a bottom-up, problem-driven approach.