Working Papers

Is Decentralization Sustainable in the Bitcoin System?

Revise and Resubmit at Journal of Financial Economics  Show Abstract

Abstract: We examine whether decentralization is sustainable in the Bitcoin system. The Bitcoin system is a decentralized system in that any participant can potentially verify and record transactions onto a public ledger. Using a game-theoretic model, we show that operating costs and financial constraints are key factors that threaten the sustainability of the decentralization of the Bitcoin system. We then provide empirical evidence that supports the model’s prediction. Collectively, we show that even though the Bitcoin system is designed as an egalitarian system it is likely to evolve into a centralized system, with one or few large players capturing the verification and recording functions.
Keywords: Bitcoin, Blockchain, Cryptocurrency, FinTech, Mining, Proof-of-work, Miners, Miner-Competition
Coauthors: Suresh Radhakrishna, Varghese S. Jacob
SSRN, Code/Data

Decentralized Governance and Collusion in a Blockchain Application.

Under Review   Show Abstract

Abstract: Many blockchain platforms delegate governing power to their users, enabling decentralized governance. This study shows how a vote-based governance mechanism in blockchain platforms can have undesired coordination among users. We look into Steemit, a blockchain-based social media platform, where users (authors) publish articles to earn tokens based on the votes received from other users (curators). Using transactions data from the blockchain platform, we find evidence that authors collude by buying votes. We show that colluding authors make an extra reward worth $29 per week than what non-colluding authors make. The high productive authors make maximum gains from collusion, whereas the low productive authors may not make a profit considering the expenses on collusion. We show that colluding authors contribute to the platform for a longer period than non-colluding authors do. However, colluding authors gradually reduce their contributions over time. As more authors collude, the overall quality of contributions deteriorates, and the market value of the platform also reduces. Our findings have practical implications for designing governance mechanisms in blockchain applications.
Keywords: blockchain, decentralized governance, collusion, incentive design, token economics
Coauthors: Zhiqiang (Eric) Zheng, Zhe Zhang
SSRN, Code/Data

Do the Bitcoin’s Scaling Solutions Work? An Empirical Analysis.

Under Review  Show Abstract

Abstract: Most cryptocurrencies are blockchain-enabled payment platforms that use a peer-to-peer network to process transactions without any trusted intermediaries. As cryptocurrencies gain popularity, these blockchain platforms face many limitations on scalability and efficiency. To address these limitations, the blockchain community introduces new policies that aim to provide better experiences to their users. These policies—often introduced without a central planner—can directly affect the platforms’ stakeholders, such as service providers, users, and miners. In this study, we investigate how one of the policies, known as Segwit that is intended to increase the Bitcoin system’s scalability, impacts transaction quality, e.g., transaction fees and delays, for its stakeholders. This study examines the aftermath quality of transactions after introducing the policy in the Bitcoin system and its adoption by service providers. We find that overall transaction fees are lower after the introduction of Segwit, but the system sees no improvement in delays. The service providers’ implementation of Segwit affects the providers and their customers differently. Their customers pay higher fees than what the service providers pay, and the service providers see longer delays than what their customers face for transactions. We also show that the participation of miners reduces as the adoption of Segwit grows in the system. We argue that the scalability solution does not provide all benefits because the adoption of Segwit is slow for stakeholders and reduce incentives for miners to participate in the transaction validation process. Our findings have managerial implications on how to bring about policy changes in blockchain-enabled platforms so that all stakeholders can benefit.
Coauthors: Liangfei Qiu, Subodha Kumar
SSRN, Code/Data

Impact of Agency Pricing Model on E-Books and Print Books in Online Retailing: An Empirical Examination

Major Revision  Show Abstract

Abstract: Two commonly used pricing models in the supplier-retailer setting are the agency pricing model and the wholesale pricing model. In the agency pricing model, the supplier sets the price, whereas, in the wholesale pricing model, the price is set by the retailer. In this paper, we focus on the selling of e-books and print books by an online retailer using these pricing models. Traditionally, for print books, online retailers (such as Amazon) use the wholesale pricing arrangement with the publishers. However, for the e-books, they use either the agency pricing model (where the publishers set the price) or the wholesale pricing model (where the retailers set the price), primarily after a high profile case brought by the Department of Justice against Apple claiming that the agency model utilized by Apple caused higher prices and decreased consumer surplus. Essentially, the agency pricing model allows the publishers to take control over e-books and reduces the bargaining power of online retailers in setting retail prices of e-books. In this study, using the data from Amazon, we examine whether the agency contract between publishers and online retailers affects the prices of e-books and print books. Our empirical analysis shows that e-books prices are higher for publishers with an agency contract compared to those without such a contract. We also find that the agency contract for e-books has a spillover effect on the prices of print books. More importantly, our study suggests that the popularity of books in print and digital categories and the listing of books in the kindle unlimited subscription category moderate the prices differently for different types of contracts. These findings have significant managerial implications for publishers in selecting pricing contracts and serve to provide guidelines for policymakers in regulating pricing contracts between publishers and online retailers.
Keywords: agency pricing, e-books, kindle, pricing strategy, product popularity, empirical study, econometric modeling
Coauthors: Liangfei Qiu, Subodha Kumar
SSRN, Code/Data

Energy Consumption – Bitcoin’s Achilles Heel

Targeted at ACM Transactions on MIS  Show Abstract

Abstract: Bitcoin as a cryptocurrency has received wide public interest. As a decentralized transaction system, Bitcoin relies on the mining process, which is a necessary process to validate transactions. The mining process involves solving complex crypto-puzzles which requires significantly high computing power. This resource-hungry process has a significant impact on the energy consumption of the system. Our study looks at the mining process and the resources required to process large volumes of transactions. Using data from September 2014 to November 2018, we investigate how the mining protocol impacts the computing capacity needs of miners. We demonstrate that the complexity of the crypto-puzzle and the transaction volume significantly increase computing resource needs which in turn raises the energy consumption. We estimate that the energy demand from mining activities will drain 17.96 Gigawatt if the system processes 100 million transactions per week. Our findings suggest that the mining protocol drains significant resource requirements both from a computing hardware and energy consumption needs that the future growth of the Bitcoin network and the use of Bitcoin as a currency could be questionable.
Keywords: Bitcoin, Blockchain, Cryptocurrency, Mining, Energy
Coauthors: Suresh Radhakrishna, Varghese S. Jacob
SSRN, Code/Data



Is Delegation Good for Platforms? (Data and Analysis)
Is Proof-of-stake (POS) better than proof-of-work (PoW)? (Data and Analysis)
Smart Default with Smart Contract: An Empirical Analysis (Data Exploration)
Can blockchain stop fraud in digital ads? (Framework)

Digital Market

Impact of employees’ work-life balance on firms’ online reviews (Preliminary draft)
Say cheers! – a curious case of the tap beer industry (Data and Analysis)
Information content in option skewness – evidence from an emerging market (Old)