A principal vulnerability of a proof-of-work ("PoW") blockchain is that an attacker can re-write the history of transactions by forking a previously published block and build a new chain segment containing a different sequence of transactions. If the attacker's chain has the most cumulative mining puzzle difficulty, nodes will recognize it as canonical. We propose a modification to PoW protocols, called ADESS, that contains two novel features. The first modification enables a node to identify the attacker chain by comparing the temporal sequence of blocks on competing chains. The second modification penalizes the attacker by requiring it to apply exponentially increasing hashrate in order to make its chain canonical. We demonstrate two things; (i) the expected cost of carrying out a double-spend attack is weakly higher under ADESS compared to the current PoW protocols and (ii) for any value of transaction, there is a penalty setting in ADESS that renders the expected profit of a double-spend attack negative.
Accepted to be presented at the Future of Information and Communication Conference (FICC2024) in Berlin Germany in April 2024 and published in the Springer series Advances in Intelligent Systems and Computing.
This dissertation is composed of three chapters. Each essay describes and models the structure of a market; identifies an inefficiency in outcomes and proposes an incentive scheme to reduce the inefficiency.
Proof-of-Work mining is intended to provide blockchains with robustness against double-spend attacks. However, an economic analysis that follows from Budish (2018), which considers free entry conditions together with the ability to rent sufficient hashrate to conduct an attack, suggests that the resulting block rewards can make an attack cheap. We formalize a defense to double-spend attacks. We show that when the victim can counterattack in the same way as the attacker, this leads to a variation on the classic game-theoretic War of Attrition model. The threat of this kind of counterattack induces a subgame perfect equilibrium in which no attack occurs in the first place.
We introduce an empirical framework for valuing markets in environmental offsets. Using newly-collected data on wetland conservation and offsets, we apply this framework to evaluate a set of decentralized markets in Florida, where land developers purchase offsets from a small number of long-lived producers that restore wetlands over time. We find that offsets led to substantial private gains from trade, creating about $2.2 billion of net surplus from 1995–2018 relative to a historical conservation mandate. Offset trading also led to large differences in hydrological outcomes, driven by significant differences between restored and existing wetlands in terms of area and location. A locally differentiated Pigouvian tax on offset transactions would have prevented $1.3 billion of new flood damage while preserving more than two-thirds of the private gains from trade.
Available on the National Bureau of Economic Research website
DeFi for the Securities Industry
Decentralized Finance (DeFi) is a popular form of financial contracting in the cryptocurrency space. A key attraction is the reduction in transaction costs due to the elimination of intermediaries in favor of an atomic swap of tokens between the counterparties. The benefits of DeFi are driven by code and algorithms that are meant to ensure correct execution and accounting of the trade. However, these same advantages also remove or substantially weaken legal protections and complicate regulatory oversight. Extending DeFi to the securities industry faces these same hurdles.
DeFi for the Securities Industry report available on the Finadium website
Bank Stablecoins vs. Central Bank Digital Currencies for Capital Markets
Most major central banks are investigating the issuance of a central bank digital currency (CBDC). One motivation has been to stave off competition from stablecoins like Tether that have gained adherents, but which are not necessarily backed by safe and liquid collateral. As a retail product, CBDCs could upend long-standing frameworks of commercial bank deposit money and monetary policy transmission. There are other digital alternatives however: one is bank-issued stablecoins backed by reserves and another is a wholesale CBDC that is traded between banks.
Bank Stablecoins vs. Central Bank Digital Currencies for Capital Markets report available on the Finadium website